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International Fiscal Association India Branch - Southern Regional Chapter

Fourth Annual Conference on International Tax Theme : International Tax : Today’s issues The Taj Coromandel, Chennai 21-22 August 2009 Profile and Hand book on Presentations of Paper Presenters

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International Fiscal Association India Branch - Southern Regional Chapter

Fourth Annual Conference on International Tax Theme : International Tax : Today’s issues

Venue : The Taj Coromandel Nungambakkam Chennai - 600 034 Friday & Saturday 21-22 August 2009 9.15 a.m. - 5.45 p.m.

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DISCLAIMER The Views expressed in the presentation materials are neither the views of IFA nor Necessarily that of the organizations the authors represent.

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PROGRAMME SESSION DETAILS Day 1 : 21.08.2009 09.15 a.m. to 10.30 a.m. : Inauguration Session I : 10.45 a.m. to 12.15 p.m. Worldwide International tax update (including Obama’s recent tax proposals) By Sean M. King, Chair, International Tax Practice Group, Williams Mullen, USA As the worldwide economy continues to struggle, countries are reacting by enacting tax measures that will have significant impact on multinational organizations conducting business across borders. Some topics to be covered include: Japan’s introduction of a foreign dividend exclusion system; the UK’s new dividend exemption system and amendments to the CFC rules and overhaul of the Treasury Consent system; from the United States the Emergency Economic Stabilization Act; the Tax Extenders and Alternative Minimum Tax Relief Act; the extension of Look-Through Rule for Related CFCs; Repatriation incentives currently under consideration by the Obama administration. Session II : 12.15 p.m. to 1.30 p.m. Issues under section 195 of the Income Tax Act (India) By Sanjiv Chaudhary, Executive Director, Tax and Regulatory Services (TRS), Pricewater House Coopers, New Delhi This subject of Tax deduction at source (TDS) from payment to Non-residents is important from 3 specific angles: The first is basic – If proper tax is not deducted at source, the payer is liable for interest, penal and prosecution consequences; The second is – expenses may be disallowed; the third is the payer may be held as an agent of the non-resident and be liable to tax. On the subject of TDS per se, there are many legal controversies and practical issues on the machinery provisions and practical application. Many of these issues would be dealt with. Session III : 2.15 p.m. to 3.45 p.m. Concept of supply rules in goods and services taxation By Parind Mehta, Partner, B S R and Company, Mumbai A recurring challenge in indirect taxation in India today is with regard to double taxation more so in cross border transactions. The challenge exists within the triumvirate of federal taxes of customs duties, excise duties and service tax as also between the federal and State taxes of service tax and VAT. These challenges continue to remain, notwithstanding the decision of the Supreme Court, which has held double taxation to be impermissible. The challenge between goods taxation and service taxation is in that a transaction is either a sale or supply of goods and hence charged to the appropriate goods tax, primarily the State VAT, or a provision for services and hence appropriately chargeable to the federal service tax. Session IV : 4.15 p.m. to 5.45 p.m. Service PE and TP challenges in recessionary times By K.R. Sekar, Partner Tax, Deloitte Haskins & Sells, Bangalore The concept of service PE exists only in the UN Model and certain Indian treaties. Many issues are prevelant in this topic and also due to the fact that India has raised many objections in the OECD Model Convention 2008. The global economic meltdown has come with its own set of peculiarities. ROIs (Return on Investments) are at an all-time low, interest rates have been pushed down to spur demand, and the pricing of goods and services is currently driven by survival rather than profit. Recession throws a challenge to the concepts of arm’s length price and TP, with a situation of sharing of losses as against the revenue authority’s expectation of sharing of profits. The economic downturn coupled with inherent aggressive positions adopted by the revenue authorities would lead to increased TP litigation in India.

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Day 2 : 22.08.2009 Session V : 9.15 a.m. to 10.45 a.m. Expatriate Taxation By Amitabh Singh, Partner, Ernst & Young Private Limited, Gurgaon, Expatriates taking up employment in India will be subject to comprehensive tax, employment, visa rules. In particular, there are not only many planning opportunities but also very many issues. This topic is very relevant for both persons in practice and industry for it will enrich the scientific debate and also help practitioners and companies to find their way through the related legal aspects. Session VI : 11.00 a.m. to 12.15 p.m. Offshore Financial Centers’, Tax Havens and the OECD By Gurbachan Singh, Senior Partner (Tax & Trusts), Khattar Wong, Singapore Tax Havens have been in the news recently. They were held to be partly responsible for the upheavals in the financial markets and the current economic crisis. OECD countries have launched a crack-down on such tax havens. The worldwide recession has also been instrumental in many developed countries mounting pressure on Tax Havens to exchange information about investors who may have stashed away their wealth in such havens. This session attempts to discuss about features of tax havens, the economic need for tax friendly countries and discusses OECD’s policies against Tax Havens. Session VII : 12.15 p.m. to 1.35 p.m. Entering Europe : The free movement of capital By MMag. Sabine Heidenbauer, Assistant Professor at the Institute for Austrian and International Tax Law, Vienna Freedom of capital movement is enshrined in Article 56 of the EC Treaty. As the European Union ensures the free movement of capital not only within Member States but also with respect to third countries such as India. Session VIII : 2.20 p.m. to 3.45 p.m. Triangular Cases in Tax Treaties By Bart Kosters, Team Manager, IBFD Tropicals Knowledge Group, International Bureau of Fiscal Documentation (IBFD), The Netherlands The difficulties in the application of Double Tax Conventions (DTCs) to multilateral situations predominately result from the fact that DTCs are normally concluded on a bilateral basis, which does not take into account trilateral issues thereby resulting in uncertainties in treaty application. Tax courts in many developed countries have been pronouncing decisions in a triangular scenario. Due to the growing importance of triangular tax cases, the complex legal issues pertaining to them and the lack of comprehensive coverage in legal science “Triangular Tax Cases” have been chosen as a topic for the conference. Session IX : 3.55 p.m. to 5.30 p.m. Brain Trust Session With Eminent Tax Experts as Trustees

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PRESENT OFFICE BEARERS INDIA BRANCH Sl.No.

Name

Designation

Phone

Email

1

Mr. O.P. VAISH

PRESIDENT

1152492525

opvaish@vaishlaw.com

2

CA T.P. OSTWAL

CHAIRMAN

2256351835

fca@vsnl.com

3

Mr. S.R. WADHWA

VICE CHAIRMAN

1141554222

wadhwasr@hotmail.com

4

CA SUSHIL LAKHANI

SECRETARY

2256311895

sushillakhani@vsnl.net

5

CA H. PADMACHAND KHICHA

JT. SECRETARY

8022875082

padamkhinch@vsnl.com

6

CA JITENDRA SANGHAVI

TREASURER

2222624578

jbsanghavi@vsnl.com

PRESENT OFFICE BEARERS 2009-10 INDIA BRANCH – SOUTHERN REGIONAL CHAPTER Sl.No.

Name

Designation

Phone

Email

1

CA S. SUNDARRAMAN

CHAIRMAN

044-24992155 / 9444081587

ssundarraman@vsnl.net

2

CA R. ANAND

VICE CHAIRMAN

044-42194550 / 9444049467

mrnarainco@eth.net

3

CA R. SUNDARARAJAN

SECRETARY

044-28261955 / 9444393420

fcasundararajan@yahoo.com

4

CA R.G. RAJAN

TREASURER

044-24333779 / 9884046840

rgr@airtelmail.in

EXECUTIVE COMMITTEE MEMBERS INDIA BRANCH – SOUTHERN REGIONAL CHAPTER Sl.No.

Name

Phone

Email

1

CA B. RAMANAKUMAR

39145105 / 9841113024

ramanakumar@kpmg.com

2

CA S. SRIRAM

42987005 / 9003066300

sriram.seshadri@bmradvisors.com

3

CA K.S. YOGANANDH

42903333 / 9884016600

ksy@mca.co.in

4

CA C. RAJESHWAR

9003020141

rajeshwar.chakka@in.pwc.com

5

CA C.S. RAMESH BABU

24402459 / 9840134257

fca.ramesh@gmail.com

6

CA PRADEEP BHANDARI

25611073 / 9840307272

pbhandari@eth.net

7

CA P.G. SADGURUDAS

24987625 / 9841074968

ugopinathandco@yahoo.co.in

8

CA N.S. SRINIVASAN

24832550 / 9841348713

venkatandvasan@airtelmail.in

9

CA. P. ANAND

43081246 / 9381067673

anandp08@yahoo.com

v


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Sean M. King Sean King is chair of the firm's International Tax Practice Group. He focuses his practice on international business transactions and taxation. He has extensive experience in the representation of private and publicly traded corporations; development and implementation of tax strategies for structuring international mergers and acquisitions; restructuring and disposition of foreign investments, including the formation and use of foreign tax credit planning; and effective utilization of income tax treaties. He consults with clients on a wide array of international tax issues, including complex reorganization transactions, investment in emerging markets, bankruptcy workouts, private equity and IRS controversies.

Mr. King is a member of the State Bar of Michigan and is admitted to practice before the U.S. Tax Court. He is also a member of the North Carolina Bar Association where he serves as a member of the Council of the International Law Section. He also serves on the board of advisors and is a regular speaker for the Alliance for Tax Legal and Accounting Seminars and other various state bar associations. Mr. King has served as a contributing author to the Journal of Taxation of Global Transactions. In 2009, Mr. King was honored to be included in The International Who's Who of Corporate Tax Lawyers.

He received his master of laws degree in taxation, magna cum laude, from the ChicagoKent School of Law. He received his juris doctor degree, cum laude, from Michigan State University College of Law and his bachelor of arts degree from the University of Michigan at Ann Arbor.

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International Fiscal Association India Branch 4th Annual Conference 21 August 2009

Sean M. King

Agenda • Foreign Bank Account Update • Washington Update – Obama Administration Proposals – Congressional Proposals

• Contrast with Other Jurisdictions • Planning Considerations and Opportunities – Section 956 Traps – Repatriation Planning – Taking advantage of depressed values 2


Foreign (non-US) Bank Account Reporting

Foreign Bank Account Reporting • Not a new requirement. • Each U.S. taxpayer must file a Report of Foreign Bank and Financial Accounts (FBAR) if the person has a financial interest or signature authority over one or more accounts in a non-U.S. country and the value of the account exceeds $10,000 at any time during the year. • Consider corporate executives.

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Foreign Bank Account Reporting • Why now? • UBS fallout – a perfect storm • Distinguish between IRS Form 1040 Schedule B requirements • IRS Amnesty Program – Extension granted until Sept 23, 2009

IRS Amnesty Program • Short-term settlement program for U.S. taxpayers that have failed to properly comply with the annual reporting of nonU.S. bank accounts. • Under the settlement program, taxpayers may pay a one-time penalty payment of 20% of the account value or 5% of an inherited account.

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FBAR Special Considerations • Working with accountants – Amended Returns – Kovel letters – Retainers and practice management • Sibling considerations • Covert “traps” for practitioners

Obama Administration: International Tax Proposals

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Background • Economic “stimulus” • An ode to the Union vote. • Total control of House and Senate: – 60 seat majority allows for “filibusterproof” Senate.

Proposal • $210 billion in revenue increases through international tax measures – Deferral • Proposed $60 billion in revenue

– Foreign tax credit reform • Proposed $45 billion in revenue

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Deferral • Severely restrict “deferral” rule – currently allows companies to keep from paying US tax on foreign earnings until they are repatriated back to the US – Also lets U.S.-based multinationals deduct expenses for overseas operations • Proposes that the companies pay tax on non-repatriated earnings • Must defer taking their deductions until their foreign earnings are brought back to the US

Implications for US Companies? • Tax burden on Foreign operations – Limits on deferral would increase current taxes on US companies

• Competitiveness – Increased taxes on US foreign subs. limit competitiveness against foreignowned companies abroad (95% of world’s consumers)

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US Congress: International Tax Proposals

Congressional Proposals • Stop Tax Haven Abuse Act – Sec. 7492: There will be a presumption of control for U.S. entities (other than those publicly traded) that have formed, transferred assets or have a beneficial interest in an entity (other than those publicly traded) operating in an “offshore secrecy jurisdiction.” – Sec. 7701(a)(50)(E): The initial list of “offshore secrecy jurisdictions” would, among others, include: • Cyprus • Hong Kong • Luxembourg • Malta • Singapore • Switzerland

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The Impact of Health Care Reform • Democratic leaders in the U.S. House of Representatives unveiled America’s Affordable Health Choices Act of 2009, a bill they contend would expand healthcare coverage to currently uninsured Americans (the “Bill”). The House and Senate must still pass the Bill. • Part of the Bill is being paid for using new taxes and tax reforms, which will be discussed in the following

Excise Tax • An employer will be subject to an excise tax equal to 8 percent of the employer’s annual payroll if it fails to provide “acceptable” healthcare coverage – 0 to 6 percent excise tax will apply to employers with annual payrolls that do not exceed $400,000.

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Limitation on Tax Treaty Benefits for Withholding Taxes • Limit the ability of U.S. subsidiaries of foreign multinational companies to claim treaty benefits to reduce withholding taxes – Currently, a U.S. subsidiary can make a deductible payment to a foreign affiliate located in a country with which the U.S. has a tax treaty, and the U.S. subsidiary can apply the lower withholding tax provided in the treaty

• Congress is concerned companies are routing payments through advantageous jurisdictions to gain treaty benefits

Economic Substance Doctrine • Judicial doctrine to deny tax benefits to transactions that produce tax benefits but have no economic substance • A taxpayer can satisfy the economic substance doctrine only if: – The transaction changes in a meaningful way (apart from federal tax consequences) the taxpayer's economic position, and – The taxpayer has a substantial non-federal tax purpose for entering the transaction

• 20 percent penalty on the understated tax liability if the taxpayer fails to satisfy the economic substance doctrine (40% for failure to disclose facts) 10


Contrast With Other Jurisdictions

Other jurisdiction trends - UK • Expansion of Participation Exemption Regime – A participation exemption has been introduced that will result in dividends or other distributions received from foreign corporations on or after July 1, 2009 being mostly exempt from tax. – Will this place the UK on par with other holding company jurisdictions? • How will traditional UK CFC rules be impacted? 11


Other jurisdiction trends - Japan • Foreign Dividend Exemption – Current rules allow “overall” foreign tax credits to eliminate double taxation on dividends received from non-Japanese subsidiaries when the dividend received is included in taxable income of the Japanese parent corporation. – For Japanese parent corporations, the new rules would exclude a certain percent of dividend income received from non-Japanese subsidiaries (e.g., 95% of dividends). – Withholding tax would neither be subject to direct foreign tax credit nor tax deduction for foreign withholding tax imposed on dividends.

Important Policy Issues: For further consideration

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Issues for Policy Makers to Consider

• Advocates for restricting deferral – Law unfairly subsidizes foreign production at expense of US investment and Jobs – Foreign production substitutes for production at home (U.S.)

Issues for Policy Makers to Consider

• Advocates for maintaining deferral – Foreign production compliments US economic activity • Aides in penetrating new markets

– Study found that for every 10% increase in sales by foreign subs., exports by US parents to their subs. Increase by 6.6%

• Adverse Effect – US companies taking entire operation abroad 13


Preparing for the Coming Debate

• Analyze Company Effects – Analyze company’s ability to compete – What would be effects of profitability on foreign operations – What would changes mean for parent – Review past proposals for limiting deferral

Preparing for the Coming Debate

• Inform Congress and Treasury – Affect on US workforce – Affect on foreign operations

• Be Prepared for Multiple Scenarios – Minimize impacts through planning

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Planning: Considerations and Opportunities

Financing Challenges • IRS Section 956 – Traps & Opportunities – Be mindful of traps that can cause 956 inclusions as a result of investment in U.S. property. – Third-party financing arrangements can cause 956 issues for a U.S. parent when the CFC: • pledges CFC assets to secure the U.S. parent’s loan; • the CFC guarantees the U.S. parent’s loan; – or • makes indirect pledges or guarantees accompanied by certain types of negative covenants or restrictions.

• But little or no E&P?

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A silver lining? • Planning Opportunities • Repatriation Planning – Consider section 304 and 1248 transactions that focus on E&P for purposes of determining gain • Internal reorganizations possible for high-value, low E&P entities • IP Planning – IP migration should be considered or reconsidered where diminished valuations can be sustained.

QUESTIONS?

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Supplemental Materials: Detailed examples of US International Tax Reform Proposals

Deferral of Certain U.S. Income Tax Deductions •

Application – Foreign related deductions of the U.S. company deferred unless foreign source income is taxed currently – Deferred deductions carried forward and treated as current year expenses for purposes of determining allowed expenses in that year Effects – Increases the cost of capital – Increases cost of performing SG&A in the U.S.

Considerations – – – –

Review expense allocation Recognize built-in gains in CFCs Reevaluate charge-outs and location of SG&A functions E&P studies 17


Example 1 $250 deductions allocable to FS income

USP

F1

$100 = §951 inclusion

F2

$400 current non-subpart F E&P

$100 current subpart F E&P

Facts: • USP is a newly formed US corporation; F1 and F2 are newly formed CFCs • F1 and F2 have no transactions with each other and no US property • F2 has subpart F current E&P of $100 • F1 has non-subpart F current E&P of $400 • USP has no income other than $100 of gross income under §951(a)(1)(A) from F2 • USP has $350 of what would be deductions under present law • Currently taxed foreign income = $100; Deferred foreign income =$400; Foreign related deductions (determined under 861 principles) = $250

Example 1 $250 deductions allocable to FS income

F1

USP

$100 = §951 inclusion

Results • Deductions allowed = $50 = FRDs x current inclusion ration = $250 x 100/500 • USP taxable income = $100 - $50 + 78 gross-up (if any) • Deferred deductions = $200 ($250-$50)

F2 Formula for allowed Deductions

$400 current non-subpart F E&P

$100 current subpart F E&P

FRD x Current Foreign Source Inc. Foreign Subsidiary Earnings (current and deferred)

Greenbook states that the deferred deductions are carried forward and combined with the next year’s foreign source expenses before determining the impact of the provision in the subsequent year.

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Foreign Tax Credit reform: Single pool of §902 credits •

Application – Deemed paid foreign tax credit computed based on a pro rata share of all foreign taxes of all foreign subs. Multiplied by the ratio of distributed foreign E&P to total E&P of all subsidiaries qualifying for the deemed paid credit Effects – Increases the cost of repatriating earnings to the U.S. – Incentive for companies to retain more earnings abroad Considerations – Maximize foreign tax credit paid or deemed paid in the U.S. in pre-effective date period – Evaluate foreign branch operations or first-tier disregarded entities – E&P analysis becomes more important; evaluate built-in-again assets in foreign subsidiaries

Foreign Tax Credit Reform: Matching Rule • Application – Foreign tax credit disallowed where foreign income is not matched up with foreign taxes

• Effects – Might limit foreign tax credits in certain flow-through entity structures

• Considerations – Review pre-effective date allocation of earnings and taxes 19


Foreign Tax Credit Reform: Dual capacity Taxpayers •

Application – Eliminates regulatory safe harbor allowing credits where a levy is imposed but the country does not impose an income tax • Credit is only allowed for countries where an income tax is imposed and it is applied to a broad base of taxpayers – Would not override treaty obligations that allow for taxes paid or accrued on certain oil and gas income – Converts §907 limitation into a separate §904 category Effects – Restricting foreign tax credits for oil and gas extraction companies operating in certain jurisdictions and narrows the §904limitation category of income related to oil and gas extraction income Considerations – Should evaluate the extent to which they have relied on the safe harbor for dual capacity taxpayers in the §901 regulations

Classification of Foreign Entities • Application – Foreign eligible entities with a single meber treated as corporations for U.S. tax purposes, except: • Entity and the single member are created or organized in, or under the laws of, the same foreign country; or • Disregarded entity (“DRE”) is a first-tier entity wholly owned by a U.S. person, except in the case of “U.S. tax avoidance” 20


Classification of Foreign Entities • Effects – Restricts efficient cross border transactions’ – Increases foreign tax imposed on U.S. multinationals • Considerations – Active royalties/rents: true branches and other structuring alternatives – Interest: hybrid instruments, same country financing – Evaluate disregarded transactions before effective date

Repatriation in Certain CrossBorder Transactions •

Application – Boot within gain limitation §356(a)(1) is not applicable when the acquiring corporation is a foreign entity and the exchange has the effect of a distribution of a dividend under §356(a)(2) Effects – Boot in excess of gain in cross-border reorganizations may be fully recognized Considerations – Evaluate the impact on foreign subsidiaries with little or no built in gain in the stock of the subsidiary

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Definition of Intangible Property • Application – Definition (intangible property) would include workforce in place, goodwill, and going concern value – IRS may value IP on an aggregate basis – Must be valued at its highest and best use • Effects – Cost sharing arrangements must be evaluated in light of the IRS positions related to the value of existing IP • Considerations – Impact of the proposal on cost sharing arrangements

Earnings Stripping by Expatriated Entities •

Application – Debt-equity safe harbor not available to expatriated entities – “adjustable taxable income” threshold reduced from 50% to 25% – Carry forward of disallowed deductions limited to 10 years – Include any foreign corp. that would be treated as expatriated under §7874, as if §7874 had been effective for TYB after July 10, 1989

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Earnings Stripping by Expatriated Entities • Effects – Prospectively reduces interest deductions for entities subject to §7874 if it had been in effect as of 7/10/89

• Considerations – Consider debt location – Ensure entities do not meet the definition of expatriated entities in historical years

Repeal of 80/20 Companies • Application – Full repeal of 80/20 companies • Effects – Withholding tax may be imposed on U.S. company paying interest to foreign persons • Considerations – Impact of the change on current interest payments made by U.S. corporations and the need to restructure financing transactions 23


Equity Swaps Withholding Tax • Application – Treasury will revoke Notice 97-66 – Foreign persons earning income on equity swaps that reference U.S. equities would be treated as U.S. source to the extent the income is determined by reference to dividends of a domestic corp. • Effects – Withholding tax on transactions that historically may have been fully exempt • Considerations – Review current notional principle contracts to determine the withholding tax consequences

Enforcement Related Provisions •

Application – Reform to the qualified intermediary program – Increases withholding by financial institutions on U.S. source income paid to individuals who use non-QI’s – Extension of the statute of limitations to 6 years from date of reporting certain international transactions – Additional reporting and penalties related to overseas investments – Addition of rebuttable presumption standards woth respect to certain withholding and court proceedings – New reporting requirements – Call for 800 additional tax agents

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Enforcement Related Provisions •

Effects – Increased administrative burden for taxpayers and financial institutions

Considerations – Increased reporting obligations will impose a significant compliance burden, particularly in the financial services industry

Sean M. King Partner & Chair International Tax Practice Group Williams Mullen sking@williamsmullen.com + 1 919 981 4049 www.williamsmullen.com

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Sanjiv Chaudhary Sanjiv is an Executive Director with the Tax and Regulatory services in New Delhi and has over 25 years of professional experience in direct tax matters and has work experience with professional firms of repute. He is a Chartered Accountant and a law graduate. He has rendered tax and management services including advice on foreign collaborations and joint ventures and specializes in domestic and international taxation including tax issues on mergers and de-mergers. He has also worked with a large number of multinational companies on domestic and cross border taxation including tax treaty interpretation alternate dispute resolution. Sanjiv has been a tax partner in KPMG wherein he was also heading the operations in Delhi and was responsible for tax practice including tax, transfer pricing and mergers & acquisitions. Sanjiv has been a member of the Fiscal Law Committee of the Institute of the Chartered Accountants of India for a number of years and also the Research Committee and the Editorial Board which is responsible for the publication of the journal “The Chartered Accountant”. Sanjiv has written the basic draft of the book – “Aspects of International Taxation- A Study” published by the Institute of the Chartered Accountants of India. He has also contributed articles on transfer pricing and international tax issues in various journals and newspapers. He is a prolific speaker at various / national and international forums. Sanjiv has been a member of the tax committee at PHD, FICCI and ASSOCHAM. He has been the Chairman of Tax & Tariff Committee of the American Chamber of Commerce.

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International Fiscal Association India Branch – Southern Region Chapter (4th Annual Conference of International Tax)

Section 195 – Overview and Issues

Sanjiv Chaudhary

*connectedthinking

Snapshot • Glossary • Overview of Section 195 • Analysis of Section 195 • Payment to NRs – Procedure & requirement • Some Interesting Issues • Refund of Taxes Withheld u/s 195 • Consequences of Non Compliance • Key Takeaways

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Glossary •

Act – The Income Tax Act, 1961

AO – Assessing Officer

CBDT – Central Board of Direct Taxes

CG – Central Government

DTAA – Double Taxation Avoidance Agreement

FTS – Fees for Technical Services

FY – Financial Year

HC – High Court

ITAT – Income Tax Appellate Tribunal

NR – Non Resident

PAN – Permanent Account Number

SC – Supreme Court

TRC – Tax Residency Certificate

U/s – Under Section

Overview of section 195

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Overview of Section 195 Section

Provisions

195(1)

Scope and conditions for applicability

195(2)

Application by the “Payer” to the AO

195(3)

Application by the “Payee” to the AO

195(4)

Validity of certificate issued by the AO

195(5)

Powers of the CBDT to issue Notifications

195(6)

Furnishing of information by payer

195A

Grossing up of tax Part of Chapter XVII of the Act – A collection and recovery measure

Broad Analysis of section 195

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Section 195(1) - Analysis •

Payment made by any person to Non Resident or Foreign Company

Scope v Covers – All sums v Does not cover – Salaries, Dividends referred in Section 115O

Time – Credit or Payment whichever is earlier

Rate – Rate in force

Credit to expense payable A/c or Suspense A/c attracts withholding obligation

Withholding tax not conclusive; subject to regular assessment

Section 195(1) - Scope Payment made by any person to Non Resident or Foreign Company •

Whether payment made by a NR to another NR outside India is covered under the ambit of section 195 v

View 1 – Section 195 does not apply to payments made outside India â

v

Shrikumar Poddar (1997) (65 ITD 48) (ITAT) (Mum.)

View 2 – Section 195 apply to payments made outside India â

Satellite Television Asian Region Ltd. (99 ITD 91) (Mum.) (ITAT)

â

Vodafone International Holding BV (311 ITR 46) (HC) (Mum.)

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Section 195(1) - Scope Payment made by Foreign Company to NR (Expats) seconded •

Obligation to withhold tax u/s 192 may arise for payments made by NR/ Foreign Company to NR in relation to services rendered in India v

Eli Lilly and Co. India (P) Ltd. (312 ITR 225) (SC)

v

Babcock Power (Overseas Projects) Ltd. (81 ITD 29) (Del.) (ITAT)

Section 195(1) – Any Sum Chargeable • Chargeability to tax governed by provisions of Act / DTAA Nature of Income

Act*

DTAA (OECD model convention)

Business / Profession

S.9(1)(i)

A.5 & A.7

Salary Income

S.9(1)(ii), S.9(1)(iii)

A.15

Dividend Income

S.9(1)(iv), S.115A

A.10

Interest Income

S.9(1)(v), S.115A

A.11

Royalties

S.9(1)(vi), S.115A

A.12

FTS

S.9(1)(vii), S.115A

A.12

Capital Gains

S.9(i)(i)

A.13

* Apart from S.5, wherever applicable

Act/ DTAA, whichever is beneficial prevails

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Section 195(1) - Any Sum Chargeable •

Any sum chargeable to tax means - Amount paid which wholly bears the character of income or - Gross amount, the whole of which may or may not represent income or profits Transmission Corporation of AP Ltd. (1999) (239 ITR 587) (SC) Headstart Business Solutions (P) Ltd. (2006) (285 ITR 530) (AAR)

Section 195 does not apply if sum paid to NR is exempt from tax in India Hyderabad Industries Limited (188 ITR 749) (HC) (Karnataka)

Section 195(1) - Any Sum Chargeable

… contd.

• Tax is deductible u/s 195 on payment to non-resident agent for services

rendered in India v

Affirmed by - Circular No. 786 dt. 7 Feb. 2000

v

Contrary view - Rajiv Malhotra (2006) (284 ITR 564) (AAR)

• The payer is liable to withhold tax u/s 195 even if the payment is made

in kind

Kanchanganga Sea Foods Ltd. (2004) (265 ITR 644) (HC) (AP)

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Point of Tax Withholding •

Tax shall be withheld at the time of credit or payment whichever is earlier

Payment of Royalty under DTAA - tax deductible on payment? - Affirmed by - National Organic (96 TTJ 765) (Mum) (ITAT) - Contrary View - Flakt (India) Ltd (267 ITR 727) (AAR)

Tax withholding in cases where RBI approval required - United Breweries Ltd – (211 ITR 256) (Kar) (HC) - Pfizer Corporation ��� (259 ITR 391) (Mum) (HC)

Tax to be withheld even when no remittance on adjustment of dues - Raymond Ltd. – (86 ITD 791) (Mum) (ITAT)

Section 195(1) - Rates in Force •

Section 2(37A)(iii) - Rates of income-tax specified in the Finance Act or the DTAA - Beneficial rates to be applied • Circular No. 728 dt. 30 October 1995

Are rates prescribed under DTAA to be increased by surcharge and education cess?

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Section 195(2) - Application by Payer •

Application by the Payer to the AO for determining appropriate portion of sum chargeable

Alternate Mechanism - CA certificate

Section 195(2) - Application by Payer Whether it is mandatory to approach AO for non-withholding of tax ? •

Assessee is duty bound to approach the AO u/s 195(2) - Cheminor Drugs Ltd - 76 ITD 37 (Hyd) (ITAT) - VAN Oord ACZ India (114 TTJ 808) (Del) (ITAT) - Frontier Offshore Exploration (India) Ltd. (118 ITD 494) (Chennai) (ITAT) - Intel Tech India (P) Lt d. (2009) (Bang.) (ITAT) - Transmission Corporation of AP Ltd. (1999) (239 ITR 587) (SC)

Assessee is not duty bound to approach the AO u/s 195(2) - Maharashtra State Electricity Board - 90 ITD 793 (Mum) (ITAT) - Indopel Garments - 86 ITD 102 (Mad) (ITAT) - SOL Pharmaceuticals Ltd. - 83 ITD 72 (Hyd) (ITAT)

34


Section 195(3) - Application by Payee Section 195(3) - Application by NR payee for NIL tax withholding

- Applicable to: • •

foreign bank branches and other branches subject to certain conditions â In operation for at least 5 years â Value of fixed assets in India exceed Rs.50 lakhs NR payee is regularly assessed to tax and should not have defaulted in respect of Indian tax, interest, penalty, fine etc.

Section 195(4) – Validity of certificate issued by AO •

A certificate granted u/s 195(3) shall remain in force: â â

for the FY mentioned therein, or until cancelled by the AO before expiry of FY

Provisional Certificate only

Payer may still be liable as Representative Assessee u/s 163 â

National Industrial Development Corp. Limited (253 ITR 489) (Del) (HC)

35


Section 195(5) – Powers of CBDT •

CBDT can by notification in the Official Gazette make rules specifying the cases for the grant of certificate u/s 195(3) and the related conditions

Section 195(6) – New Rules for information •

Introduction of section 195 (6) by the Finance Act 2008 (w.e.f. 01.04.2008) â

Requires the person making payment to NR to furnish the information relating to payment

Furnishing of information – New Rule 37BB (w.e.f. 01.07.2009) â

Furnishing of information to the tax department – Form 15CA

â

To obtain CA certificate before making payment to Non-Resident – Form 15CB

36


Section 195A - Grossing up of Tax •

Grossing up required in case of net of tax payments

Not applicable in case of payments referred to in S.192(1A) - Non monetary perquisites taxable as salary

Amount of tax payable by the NR has to be added to the income remitted to the NR and the tax payable by the NR should be determined with reference to the gross figure arrived at as above (Asian Development Service (239 ITR 714) (Ker) (HC)

Multiple Grossing up not to be done in case of presumptive tax ONGC (264 ITR 340) (Del) (HC)

Payment to NRs – Procedure and Requirements

37


Section 195 – Form 15CA • Scope of section 195(1) is restricted only to sum chargeable to tax under the Act • Form 15CA suggests that the payer is required to furnish the information even in respect of sum which are not chargeable to tax under the Act • Procedure â

To be filed electronically;

â

Hard copy duly signed shall be filed before making the payment to Non-resident;

• Other aspects â

Requires the payer to provide PAN of the Non-resident

Section 195 – Form 15CB • Procedure â

To be obtained prior to filing Form 15CA;

â

Need not be filed with the tax department along-with Form 15CA - Information requirement is same as per form 15CA

• Whether lower /Nil withholding tax certificate shall still be mandatory â

Form 15CA / 15CB requires the payer to furnish information relating to lower/Nil withholding tax certificate obtained from the tax officer, if any

38


Insertion of Section 206AA by the Finance (No. 2) Bill, 2009 • Proposes to insert a new section 206AA to provide for higher withholding tax rate • When â

Deductee fails to furnish its PAN to the deductor;

• Consequences â

Tax withholding should be at higher of the following: (i) Rates specified in the Act (ii) Rate or Rates in force (iii) Rate of 20% Whether Section 206AA overrides Section 90 of he Act??

Practical Issues in certification by CA • What if there are no books of accounts in India of the NR? • TRC from the NR – whether sufficient evidence for eligibility of the NR to Tax Treaty Benefits? • Characterisation Issues – whether royalty. FTS etc.? • Verification of PE in India? • Amount attributable to PE or not, if yes then quantum of amount attributable? • Can the certificate be issued when the payer does not have complete information about the payee?

Can Nil withholding foreign remittance certificate be issued???

39


Some interesting issues

Cost to cost reimbursement – Obligation u/s 195 • Cost to cost reimbursement requires TDS â

Reimbursement of Cost Allocation v Danfoss (268 ITR 1) (AAR) v Timken India Ltd. (193 CTR 610) (AAR)

â

Reimbursement of expenses alongwith FTS v

Cochin Refineries Ltd. (222 ITR 354) (Ker) (HC)

v

Steffen, Robertson & Kirsten Consulting Engineers and Scientist (230 ITR 206) (AAR)

v

Hyder Consulting Ltd. (236 ITR 640) (AAR)

40


Cost to cost reimbursement – Obligation u/s 195 •

Cost to cost reimbursement does not require TDS â

Decta (237 ITR 190) (AAR)

â

Clifford Chance UK (82 ITD 106) (Mum) (ITAT)

â

HNS India VSAT Inc. ( 95 ITD 157) (Del) (ITAT)

â

Tata Engineering and Locomotive Co. Ltd. (245 ITR 823) (Bom) (HC)

â

HCL Infosystems Ltd. (76 TTJ 505) (Del) (ITAT)

â

Dolphin Drilling Ltd. (121 TTJ 433) (Del) (ITAT)

Software Payments • Payment for Software – whether royalty?? â

â

View 1 : Payment for Software is not royalty v

Motorola Inc.– (96 TTJ 1) (Del) (SB) (ITAT)

v

Samsung Electronics – (94 ITD 91) (Bang) (ITAT)

v

Lotus Development (Asia Pacific) Pte. Ltd. (Del) (ITAT)

v

Lucent Technologies International Inc. (28 SOT 98) (Del) (ITAT)

v

Infrasoft Limited (Indian Branch Office) (28 SOT 179) (Del) (ITAT)

View 2 : Payment for Software is royalty v

Airport Authority of India (AAR No. 755 of 2007) (2008)

v

IMT Labs India (P) Ltd. vs CIT (287 ITR 450)

41


Software Payments •

Payment towards use/ access of computer server is royalty or not View 1: Payment for use/ access of computer server is royalty -

American Express (238 ITR 296) (AAR)

-

IMT Labs (I) (P) Ltd. (287 ITR 450) (AAR)

-

Cargo Community Network Pte. Ltd. (289 ITR 355) (AAR)

View 2: Payment for use/ access of computer server is not royalty -

Factset (AAR No. 787 of 2008) (2009)

-

Kotak Mahindra Primus (105 TTJ 578) (Mum) (ITAT)

-

Wipro Limited (278 ITR (AT) 57) (Bang) (ITAT)

-

Dun & Bradstreet Espana S.A. (272 ITR 99) (AAR)

Fees for Technical Services • Treaties with USA, UK, Singapore, Australia, Canada etc. have the concept of “make available” in the FTS definition â

Support from judicial pronouncements v

Raymonds Limited (86 ITD 791) (Mum) (ITAT)

v

C.E.S.C. Ltd. – (87 ITD 653) (Cal) (ITAT)

v

The Boston Consulting Group (94 ITD 31) (Mum) (ITAT)

v

Gujarat Ambuja (2 SOT 784) (Mum) (ITAT)

v

National Organic (96 TTJ 765) (Mum) (ITAT)

Make available significantly narrows down the scope of FTS

42


Refund of Tax Withheld Under Section 195

Refund of Tax Withheld u/s 195 •

Payer is entitled to claim refund in prescribed cases â

Circular No. 7/ 2007 dt. 23-10-2007 v

Contract is cancelled and no remittance is made to the nonresident

v

Remittance is made to the non-resident but the contract is cancelled

v

Contract is cancelled after partial execution

v

Retrospective amendment in law/ exemption by way of notification making the sum remitted exempt from tax

v

Order u/s 154/ 248/ 264

v

Tax deducted twice on the same income by mistake

43


Refund of Tax Withheld u/s 195 • Payer is entitled to claim refund in prescribed cases â

Circular No. 7/ 2007 dt. 23-10-2007

…contd..

v

Tax deducted at domestic tax rates; lower rate as per DTAA

v

Prior Approval of the Chief Commissioner/ Director General

v

Refund is first to be adjusted against any existing tax liability

v

Interest u/s. 244A is not payable on such refunds

v

Undertaking to be given by the payer that TDS certificate has not been issued

v

Deductee has not filed the return of income and time of filing the return has also been lapsed

v

Claim should be made within 2 years from the end of the FY in which tax has been deducted

Consequences of Non Compliance

44


Consequences of Non Compliance •

Disallowance of payments u/s. 40(a)(i) - Tax deductible but not deducted or after deduction not paid within prescribed time - Allowable in the year of payment

Disallowance of salary payments u/s. 40(a)(iii) - If tax is not paid thereon nor deducted therefrom Dolphin Drilling Ltd. (121 TTJ 489) (Del) (ITAT)

Disallowance of interest and salary payable outside India u/s. 58(1)(a)(ii) and 58(1)(a)(iii)

• •

45


Key Takeaways

Key Takeaways •

Payment to non-residents should be thoroughly examined from tax withholding perspective - Provisions of the Act or DTAA, whichever beneficial, shall apply

Payments can be remitted under the alternate mechanism (with CA Certificate) if the case is strongly supported by judicial precedents

In case of doubt coupled with substantial amount - Advisable to obtain tax withholding order u/s 195

Mitigate grave consequences of non compliance with S.195 Tax Withholding from cross-border transactions is critical

46


Open House

? www.pwc.com

Thank you

pwc 47


Name

Parind Mehta

Position

Partner, Tax & Regulatory Services, India

Qualifications

Fellow Member of the Institute of Chartered Accountants of India Bachelor of Commerce from University of Bombay, India

Experience

Parind is a Partner with the Indirect Tax practice at Mumbai, India. He has over 13 years post qualification experience in consulting and advisory practice. He has represented clients before tax authorities at various forums. He is Committee Member of various Professional and Trade Associations actively involved in discussions, representations, etc. with and before Tax department. He regularly speaks at conferences and seminars conducted by Professional and Trade Associations and has authored / co-authored various papers and publications on professional subjects. During his tenure as a professional, Parind has dealt extensively in the areas of Value Added Tax, Central Sales Tax, Service Tax across an Industry spectrum consisting of Automobile, Healthcare, Banking and Financial services, Engineering, Ports and Shipping, Utilities, Construction etc.

48


B S R and Company

Concept of supply rules in goods and services taxation August 21, 2009 Parind Mehta

At a glance

= ‘Place of supply’ – Current scenario in India = ‘Place of supply’ – International outlook = ‘Place of supply’ – future outlook in India

registered under the Indian Partnership Act, 1932. All rights re served.

49


Indirect tax structure in India

Customs Duty

State VAT

State Levies

Central Levies

Central Excise Duty

Central Sales Tax (CST)

Entry tax

Entertainment tax

Service Tax Stamp duty

Research and Development Cess

registered under the Indian Partnership Act, 1932. All rights re served.

Indirect tax structure in India (contd … ) Indirect tax

Tax authority

Applicable on

Effective Rate

Customs duty

Import of goods into India

Excise duty

Manufacture of goods in India 8.24%

CST Service tax

24.42 %/ 21.52%

Federal

Inter-state sale of goods

2% / 4%/ 12.5%

Government

Provision of specified services

10.30%

Import of technology

5%

R & D Cess Value Added tax (‘VAT’)

State Governments

Sale of goods within the state

4% / 12.5%

Entry tax/ Octroi

State Governments/ Local Authorities

Entry of goods into a state/ local area for consumption, use or sale

Nil to 12.5%

registered under the Indian Partnership Act, 1932. All rights re served.

50


‘Place of supply ’

Current scenario in India

= Currently, no separate code / rules governing “place of supply” for “goods” or “services” = Goods – origin based taxation under current VAT regime – interstate transactions within India – originating state collects CST – cross border transactions – crossing of customs frontiers; no VAT on import and export = Services – destination based consumption tax – interstate transactions within India – no relevance of ‘place of supply” since Service tax is Fe deral levy, charged and collected by Central Government irrespective of place of supply within India – cross border transactions – export rules and import rules framed to determine taxability of service in India registered under the Indian Partnership Act, 1932. All rights re served.

Need for separate code for ‘ place of supply Indian Indirect tax structure poised for major reform, with the proposed introduction of GST Single unified tax on both ‘Goods & Services’ Excise duty, Service tax, VAT, Entry ta x, Entertainment tax, Luxury tax to get subsumed within the GST ambit Proposed GST structure – Dual GST power to levy tax is both at the Federal and State levels i.e. each transaction to attract (a) Central GST and (b) State GST Out of various issues that needs to be addressed in GST regime, one of the key issue is taxability of interstate transactions on goods and services GST–destination/ consumption based taxation. “Place of supply” relevant to Identify appropriate jurisdiction where tax is payable i.e. state (in case of interstate transactions within India) or country (in case of cross border transactions), where supply of goods/ provision of service takes place registered under the Indian Partnership Act, 1932. All rights re served.

51


Need for separate code for ‘place of supply’ (contd..) Transaction

Current scenario

GST scenario

Interstate transaction of goods

CST charged by originating state

CST abolished – taxing power given to states as well. ‘Place of supply’ relevant to determine jurisdiction

Interstate transaction of services

Service tax collected by centre, irrespective of interstate/ intrastate

Since power to levy service tax extended to states also, ‘place of supply’ relevant to determine jurisdiction

Advantages of “place of supply rules” - removing cascading effect of taxes by determining appropriate jurisdiction and providing for credit flows across goods and services - taxes received by the state of consumption registered under the Indian Partnership Act, 1932. All rights re served.

Case study – telecom services Tamilnadu

Operator B

all S TD C

Roaming Call

Operator A

Delhi

Provision of service by Operator A to subscriber, and by Operator B to Operator A – Central GST and State GST to be charged on both transaction Place of supply – Tamilnadu or Delhi??

There would be numerous such situations of sale/ service, where determination of place of supply relevant to determine the appropriate taxing jurisdiction and the person who would be liable to remit taxes Hence, the need for separate code to determine “place of supply” registered under the Indian Partnership Act, 1932. All rights re served.

52


At a glance

= ‘Place of supply’ – Current scenario in India = ‘Place of supply’ – International outlook = ‘Place of supply’ – future outlook in India

registered under the Indian Partnership Act, 1932. All rights re served.

‘Place of supply’ – International outlook Place of supply rules in European Union (EU) = Various European countries (currently 27) – member states of EU = EEC Treaty of 1957 – formed with an objective to create single market for free movement of goods and services = Harmonization of indirect taxes as a means to create a Single market = VAT Directive issued – required Member States to introduce common system of VAT no later than 1 January 1970 = Currently, VAT Directive 2006 (2006/112/EC) in force = Since participating countries (‘member states’) aligned to VAT Directive, transactions between member states governed by “place of supply rules” registered under the Indian Partnership Act, 1932. All rights re served.

53


‘Place of supply’ – EU VAT Place of supply rules for “Goods” – Article 31-39 = Main rule: place of supply – country where transport/dispatch of the goods begins = If goods are not dispatched or transported: place of supply – country where goods physically located when supply takes place = When goods are installed or assembled: place of supply – country where installation/assembly takes place

EU in different footing than India as EU is a community of 27 countries rather than one nation having various states having taxing powers. Precedent of EU–may not be a complete answer to Indian GST scenario registered under the Indian Partnership Act, 1932. All rights re served.

Case study – place of supply rules for “goods” = Main rule: place of supply – country where transport/dispatch of the goods begins Place of supply

Germany

Austria Goods

Supplier

Customer

Invoice: exempt with credit Taxability of interstate transaction in India once CST abolished? - taxing state - Credit to dealer – dispatching state and consuming state - tracking movement of goods registered under the Indian Partnership Act, 1932. All rights re served.

54


Case study – place of supply rules for “goods” (contd…) = If the goods are not dispatched or transported: place of supply – country where goods located when supply takes place Place of supply

Hungary Germany

Austria

Goods

Supplier

Customer

Invoice: 20% Hungarian VAT Taxability of interstate transaction in India under GST contours? - GST principle – consumption based taxation - Whether situs of goods relevant to determine consumption - Registration to be obtained by dealer in multiple states registered under the Indian Partnership Act, 1932. All rights re served.

Case study – place of supply rules for “goods” (contd…) = When goods are installed or assembled:

place of supply – country where installation/assembly takes place Goods installed in

Hungary Germany

Austria

Goods

Supplier

Customer

Invoice: 20% Hungarian VAT Taxability of interstate transaction in India under GST contours? - GST principle – consumption based taxation - Whether situs of goods relevant to determine consumption - Registration to be obtainedby dealer in multiple states registered under the Indian Partnership Act, 1932. All rights re served.

55


Export of goods: VAT exempt with credit = Movement of goods out of the European Union with a destination in a

third territory (outside the EU), confirmed by Customs

Poland

Ukraine (Non EU)

Supplier

Customer Goods

Invoice VAT exempt with credit

Taxability of export transaction in India under GST contours? - Credit/ refund of Central GST and State GST incurred on procurement whether similar treatment for both levies? registered under the Indian Partnership Act, 1932. All rights re served.

‘Place of supply’ – EU VAT Place of supply rules for “Services” – Article 43-59 = General Rule (Article 43):

services are deemed to be supplied where the supplier is established or has a fixed establishment from which the service is supplied, or in the absence of such a place of business or fixed establishment, the place where he has his permanent address or usually resides One general rule but… many exceptions under EU VAT Currently in Indian service tax law - where the service supplied not relevant for domestic transactions - concept however exists (cross border transactions–import/export rules) - location of immovable property - place of performance of services - location of service recipient registered under the Indian Partnership Act, 1932. All rights re served.

56


Place of supply of services under EU VAT– exceptions = Exception 1 – place where services are physically performed

e.g. (a) services connected to immovable properties (b) transport services (for EU transport: place of departure, but if customer registered in different EU country – place of EU taxable customer) Invoice

Spanish client A

French carrier B

Transport of goods

Spain

Current EU treatment: French VAT due (being place of departure)

= =

But if customer has Spanish VAT number – Spanish VAT due

Current Indian treatment – interstate scenario:

France

=

Interstate movement not relevant as Central Government gets revenue

Taxability of interstate transaction in India under GST contours? - Whether carrier pays or whether reverse charge applies? - In which state payment to be made – Separate registration in states? - Credit on inputs/ input services? registered under the Indian Partnership Act, 1932. All rights re served.

Place of supply of services under EU VAT– exceptions Exception 2 – intangible services e.g. telecommunication service - B2B EU customers or non EU customers – location of customer (RCM) - B2C EU customer – location of supplier of service Invoice with French VAT

French Company Invoice without French VAT

Italian company

Reverse charge in the Italian company’s VAT return

Private individuals in Italy

Current Indian treatment – interstate scenario: Interstate movement not relevant as Central Government gets revenue

Taxability of interstate transaction in India under GST contours? - In which state payment to be made – Separate registration in states? - Whether B2B/B2C transaction would make any difference? - Credit on inputs/ input services? registered under the Indian Partnership Act, 1932. All rights re served.

57


Scenario building under Irish Irish VAT (intangibles) Country of establishment of supplier

Country in which customer is established

Status of customer

Place of supply

Person liable to pay Irish VAT

Ireland

Ireland

Business or Private

Ireland

Supplier

Ireland

Other EU State

Business

Other EU State

No Irish VAT

Ireland

Other EU State

Private

Ireland

Supplier

Ireland

Outside EU

Business or Private

Outside EU

No Irish VAT *

Other EU State

Ireland

Business

Ireland

Customer

Other EU State

Ireland

Private

Other EU State

No Irish VAT

Outside EU

Ireland

Business

Ireland

Customer

Outside EU

Ireland

Private

Outside EU

No Irish VAT *

* In case of telecommunications services supplied to a private customer (the effective use and enjoyment of which takes place within the State), Irish VAT applicable registered under the Indian Partnership Act, 1932. All rights re served.

At a glance

‘Place of supply’ – Current scenario in India ‘Place of supply’ – International outlook ‘Place of supply’ – future outlook in India

registered under the Indian Partnership Act, 1932. All rights re served.

58


Driving factors – place of supply Place of supply of “goods” and “services” – consideration of several factors required while drafting code to cater to various business scenarios Nature of goods (e.g. immovable property) Nature of services (e.g. related to immovable property; intangibles) Mode of delivery (e.g. physical or electronic) Nature of transaction (e.g. sale or service or works contract or leasing etc) Transaction – whether B2C or B2B

registered under the Indian Partnership Act, 1932. All rights re served.

Driving factors – place of supply (contd… )

Place of supply of “goods” and “services” – consideration of several factors required while drafting code to cater to various business scenarios Supplier (of goods/ service) – whether registered dealer or unregistered Consumer (of goods/ service) – whether registered dealer or unregistered Consumer – whether business entity or individual Supplier – whether business entity or individual Supplier and consumer – whether located in same or different states Supplier and consumer – whether intra country or cross border transaction

registered under the Indian Partnership Act, 1932. All rights re served.

59


Possible outlook under GST Scenario for place of supply of “goods” – some thoughts Place of Supply of Goods - place where tax on the Supply is to be paid - supply of Goods will be taxed on the principle of destination – final cumulative tax payable to the State of consumption Inter-State Supply of Goods - Inter-State sales to registered taxable persons – taxed on the principle of destination-cum-consumption. Entire tax on the Goods to accrue to the State of final consumption - Inter-State sales to unregistered taxable persons – grey area, consensus between states yet to be formed

registered under the Indian Partnership Act, 1932. All rights re served.

Possible outlook under GST Scenario for place of supply of “goods” – some thoughts EU VAT : Place of supply

Germany Supplier

Goods

Austria

Invoice : exempt with credit

Customer

GST : Place of supply

Chennai Supplier

Goods

Austria

Invoice : exempt with credit

Customer

registered under the Indian Partnership Act, 1932. All rights re served.

60


Possible outlook under GST Scenario for place of supply of “goods” – some thoughts EU VAT : Place of supply

Germany Supplier

Austria

Goods

Invoice: exempt with credit

Customer

GST : Place of supply

Tamilnadu Supplier

Maharashtra

Goods

GST accrue to Maharashtra

Customer

registered under the Indian Partnership Act, 1932. All rights re served.

Possible outlook under GST Scenario for place of supply of “goods” – some thoughts EU VAT : Place of supply

Germany

Hungary

Austria

Goods

Supplier

Customer

Invoice: 20% Hungarian VAT

GST :

Place of supply

Gujarat

Tamilnadu

Maharashtra

Goods

Supplier

Customer

GST accrue to Gujarat registered under the Indian Partnership Act, 1932. All rights re served.

61


Possible outlook under GST Scenario for place of supply of “goods” – some thoughts EU VAT :

Goods installed in

Hungary

Germany

Austria

Goods

Supplier

Customer

Invoice: 20% Hungarian VAT GST :

Goods installed in

Gujarat

Tamilnadu

Maharashtra

Goods

Supplier

Customer

GST accrue to Gujarat registered under the Indian Partnership Act, 1932. All rights re served.

Possible outlook under GST Scenario for place of supply of “services” – some thoughts General Rule - B2B supplies – place of business of the recipient - B2C supplies – grey area, consensus between states yet to be formed Certain exceptions to above general rule (illustrative)

Possible place of supply

Transaction Services connected with immovable properties

Place where immovable property located

admission services to Cultural, artistic, sporting, scientific, education or entertainment events or similar events such as fairs and exhibitions

place where those events take place

registered under the Indian Partnership Act, 1932. All rights re served.

62


Possible outlook under GST Scenario for place of supply of “services” – some thoughts Certain exceptions to above general rule (illustrative) (continued…) Transaction

Possible place of supply

Restaurant Services - Carried out on board ships, aircrafts and trains

- point of uploading of food and drinks

- Normal restaurant and catering services

- the place where the services are carried out

Some industries/ services may warrant special/ specific treatment/ rules e.g. telephone, broadcasting, banking, transport services - consumers located PAN India – how to account for destination based principle registered under the Indian Partnership Act, 1932. All rights re served.

Thank you The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

Presenter’s contact details Parind Mehta B S R and Company Phone: +91 (22) 3983 6616 : +91 98203 46639 Email : parind@kpmg.com 63


K.R. Sekar Partner-Taxation Bangalore, India Phone : +91 80 66276105 Fax : +91 80 66276405 email : krsekar@deloittee.com

Professional Experience K.R.Sekar is a Partner of the Deloittee Tax Group and is based in Bangalore Office. He has a wide experience of more than 15 years in the field of direct taxes, mergers and acquisitions, international taxation, and expatriate taxation and exchange control regulations. KR specializes in providing advice concerning international tax and transfer pricing issues, as well as appearing on behalf of clients before the various tax authorities, including Tax Tribunal.

Awards, Recognitions, Achievements, Publication and Articles • • • • •

Taxation of Merger, De-merger & Foreign Collaboration (Taxmann) Transfer Pricing Law & Practice (Snow White Publications) Supreme Court on Direct Tax Laws (Snow White Publications) Fringe Benefit Tax-Critical Issues and Analysis. Published various articles in Journals and Newspapers (Economic Times)

Professional Qualifications and Affiliations • Bachelor of Arts (University of Madras) • Associate Member of Institute of Chartered Accountants of India

64


Service PE & TP Issues in a downturn economy. A discussion Date : 21 August 2009

Agenda

Service PE TP issues in a downturn economy

65


.

Service PE

Contents

Concept of service PE Service PE – developing countries OECD Commentary 2008 Service PE clause - comparison India’s reservations to OECD commentary Service PE - Issues

66


Concept of service PE

History • Developing countries have: – always been concerned of the base erosion effect that consulting services have; – been wary that payment for services was a way for transferring profits to capital exporting countries; – concerned that the financial consequences of provision of services by developed countries to developing countries could be considerable.

• Developing countries have, therefore, followed the concept of source taxation by extending the concept of PE to provision of services also. • As a concept, service PE has been part of the UN model convention for a while, while it was introduced in the OECD commentary only in 2008.

Service PE 67


UN model convention • As per the UN model convention: ‘(3) The term “permanent establishment” also includes: (ii) The furnishing of services, including consultancy services, by an enterprise through employees or other personnel engaged by the enterprise for such purpose, but only if activities of that nature continue (for the same or a connected project) within a Contracting State for a period or periods aggregating more than six months within any twelve-month period.”

• No exclusion of services covered under fees for technical services (FTS), as the UN model does not have a separate clause for FTS.

Service PE

Service PE clauses – developing countries

68


Thailand – US DTA

• The furnishing of services, including consultancy services, by an enterprise through employees or other personnel engaged by the enterprise for such purpose, but only if i) activities of that nature continue (for the same or a connected project) within that State for a period or periods aggregating more than 90 days within any 12-month period, provided that a permanent establishment shall not exist in any taxable year in which such services are rendered in that State for a period or periods aggregating less than 30 days in that taxable year; or ii) the services are performed within that State for a related enterprise within the meaning of paragraph 1 of Article 9 (Associated Enterprises).

Service PE

China – US DTA • The furnishing of services, including consultancy services, by an enterprise through employees or other personnel engaged by the enterprise for such purpose, but only where such activities continue (for the same or a connected project) within the country for a period or periods aggregating more than six months within any twelve month period.

Service PE 69


India - US DTA •

Furnishing of services, other than included services as defined in Article 12 (Royalties and Fees for Included Services), within a Contracting State by an enterprise through employees or other personnel, but only if: (i) activities of that nature continue within that State for a period or periods aggregating more than 90 days within any twelve-month period; or (ii) the services are performed within that State for a related enterprise (within the meaning of paragraph 1 of Article 9 (Associated Enterprises).

Service PE

Difference in approach to service PE clause • UN model: No distinction between fees for technical services (FTS) and other services, as it does not have a clause which separately deals with FTS. • Thailand US DTA and China US DTA : Very similar to the UN model except for the period. No distinction between FTS and other services as the respective DTAs do not have a clause which separately deals with FTS. • India US DTA: Has a separate clause for fees for included services (FIS). Therefore, the service PE clause makes a distinction between FIS and other services.

Service PE 70


OECD Commentary 2008

2008 update to the OECD commentary • As per the 2008 update to the OECD commentary, states are free to agree bilaterally to include the following in Article 5: “Notwithstanding the provisions of paragraphs 1, 2 and 3, where an enterprise of a Contracting State performs services in the other Contracting State a) through an individual who is present in that other State for a period or periods exceeding in the aggregate 183 days in any twelve month period, and more than 50 per cent of the gross revenues attributable to active business activities of the enterprise during this period or periods are derived from the services performed in that other State through that individual, or b) for a period or periods exceeding in the aggregate 183 days in any twelve month period, and these services are performed for the same project or for connected projects through one or more individuals who are present and performing such services in that other State

Service PE 71


2008 update to the OECD commentary (contd) • the activities carried on in that other State • in performing these services • shall be deemed to be carried on through a permanent establishment of the enterprise situated in that other State, • unless these services are limited to those mentioned in paragraph 4 which, if performed through a fixed place of business, would not make this fixed place of business a permanent establishment under the provisions of that paragraph. • For the purposes of this paragraph, services performed by an individual on behalf of one enterprise shall not be considered to be performed by another enterprise through that individual unless that other enterprise supervises, directs or controls the manner in which these services are performed by the individual.

Service PE

Application of sub-paragraph (a) - examples • Example 1 : W, a resident of State R, is a consultant who carries on her business activities in her own name (i.e. that enterprise is a sole proprietorship). Between 2 February 00 and 1 February 01, she is present in State S for a period or periods of 190 days and during that period all the revenues from her business activities are derived from services that she performs in State S. é Since subparagraph a) applies in that situation, these services shall be deemed to be performed through a permanent establishment in State S. • Example 2:X, a resident of State R, is one of the two shareholders and employees of XCO, a company resident of State R that provides engineering services. Between 20 December 00 and 19 December 01, X is present in State S for a period or periods of 190 days and during that period, 70% of all the gross revenues of XCO attributable to active business activities are derived from the services that X performs in State S. é Since subparagraph a) applies in that situation, these services shall be deemed to be performed through a permanent establishment of XCO in State S.

Service PE 72


Application of sub-paragraph (a) - examples

Service PE

Application of sub-paragraph (b) - examples

Service PE 73


Application of sub-paragraph (b) - examples

Service PE

Service PE Clause – A comparison

74


Service PE clause – a comparison Particulars

UN model

OECD

India US

Furnishing of services

Yes. Including consultancy services

Yes

Yes

Exclusion for FTS / FIS

No

No

Yes

Other personnel engaged by the enterprise for such purpose

No distinction made. Refers to individuals

Yes

Condition that more than 50% of gross revenues should be derived from services in other state

No

Yes, in case of services being performed by a single individual

No

Requirement that services are performed within the state

Yes

Yes

Yes

6 months in a twelve month period

183 days in any twelve month period

90 days in any twelve month period

No

No

1 day

Through employees or other personnel

Time limit

Time Limit for associated enterprise

Service PE

India’s reservations to OECD Commentary on Service PE

75


Taxation of services rendered from outside India

India’s reservations •Taxation rights may exist even if services are furnished by a non-resident from outside the country.

OECD view •A country should not have source taxation rights on income derived from the provision of services by an nonresident from outside that country.

•The taxation principle applicable to the sale of goods may not apply to the furnishing of services.

•This position is similar to the position applied to sale of goods which are merely imported from outside a country, and are neither produced nor distributed through a PE in that country.

Taxation of services rendered from outside India

Service PE

Taxation of services – gross or net basis

India’s reservations •India does not agree with the above mentioned view.

OECD view •Only profits derived from services should be taxed. •Provisions in DTAs which provide for taxation of fees on a gross basis if the payer of the fees is a resident fees do not provide an appropriate way of taxing services.

Taxation of services – gross or net basis

Service PE 76


What constitutes ‘same project’?

India’s reservations •India does not agree with the above mentioned view.

OECD view •The test on what constitutes ‘same project’ should be interpreted from the perspective of the service provider. •For example: An enterprise may have two different projects to provide services to a single customer (say to provide tax advice and to provide training in an area unrelated to tax). •In such a case, the services should not be considered as being rendered for the same project

What constitutes ‘same project’?

Service PE

Supervision, direction or control

India’s reservations •India does not agree with the above mentioned view.

OECD view •Only services performed by an individual who is working under the supervision, direction or control of an enterprise should be taken into consideration for determination of a service PE. •Therefore, services provided by an enterprise to third parties through employees of another enterprise (for example an enterprise providing outsourced services) would not result in a service PE.

Supervision, direction or control

Service PE 77


Service PE - Issues

Nature of services • Where the employees of one enterprise provide services in one country to an associated enterprise under detailed instructions and close supervision of the latter enterprise, would a service PE arise? Assume that the services in question are not for the benefit of any third party

Service PE 78


‘Employees or other personnel’ – meaning • How should the term ‘other personnel’ be interpreted? Would it only get triggered if the services are provided by personnel who are under the control and supervision of the foreign enterprise?

Service PE

Same or connected project • Would projects relating to the same customer automatically be considered as a ’same or connected’ projects?

Service PE 79


Computation of number of days •

Should there be multiple counting of common days?

Service PE

Secondment of personnel- issues •

Would the enterprise in the host country be considered as the employer of such seconded personnel? Or would it be the enterprise in the home country?

If it is the latter, would such secondment agreements result in the enterprise in the home country having a Service PE in the host country?

Service PE 80


Australian tax ruling – sub-contracting • Sub-contracting will be deemed to attract service PE provisions only if the following conditions are satisfied: – The sub-contractor or the people who are performing with the sub-contractor works under the direct supervision or control of the principal contractor. – The employees of the sub-contractor are subject to the direct supervision and guidance of the principal contractor. – The nature of arrangement between the sub-contractor and the principle contractor is akin to provision of manpower for performance of services rather than performance of services.

Service PE

Determination of employer- OECD commentary • As per the 2005 update to the commentary, it is understood that the employer is the person having rights on the work produced and bearing the relative responsibility and risks. • In cases of international hiring-out of labour, these functions are to a large extent exercised by the user. • In this context, substance should prevail over form, i.e. each case should be examined to see whether the functions of employer were exercised mainly by the intermediary or by the user. • A number of circumstances, as given below, would enable one to establish that the real employer is the user of the labour (and not the foreign intermediary): – the hirer does not bear the responsibility or risk for the results produced by the employee's work; – the authority to instruct the worker lies with the user;

Service PE 81


Determination of employer - OECD commentary –

the work is performed at a place which is under the control and responsibility of the user;

the remuneration to the hirer is calculated on the basis of the time utilised, or there is in other ways a connection between this remuneration and wages received by the employee;

tools and materials are essentially put at the employee's disposal by the user;

the number and qualifications of the employees are not solely determined by the hirer.

2008 update to the OECD commentary: services provided by an individual on behalf of one enterprise shall not be considered as performed by another enterprise through that individual, unless the other enterprise supervises, directs or controls the manner in which such services are performed by the individual.

Service PE

Determination of employer – Indian judicial precedents • Till very recently, there were no judicial precedents which recognised the concept of economic employer. • The concept of economic employer has now been recognised in the following judgments: – IDS Software (Bangalore Tribunal); – Cholamandalam General Insurance (Bangalore Tribunal).

• These decisions have also held that no tax is required to be withheld by the enterprise in the host country on the reimbursement of salary costs made to the enterprise in the home country.

Service PE 82


IDS Software – Bangalore Tribunal

Secondment agreement to depute employees

Reimbursement of salary, bonuses and other out-ofpocket expenses incurred by the employee and paid by IDS Inc. at actual costs

• Appointment under the AOA and independent or special contract between the company and the director. As such it was held that the director was an employee of the company • Although IDS Inc is the employer of the employee in a legal sense, IDSI can be considered as the “economic employer” • The seconded employee being subject to the supervision and control of the board of directors of IDSI in addition to being the director of IDSI, was an employee of IDSI

Remitted the withholding tax on the remuneration of the employee to the Government and issued the withholding tax certificate to the employee

• The salary paid to the seconded employee has been subject to withholding tax and accordingly IDSI was not liable to deduct tax on the reimbursement representing the salary cost of the seconded employee, payable to IDS Inc • Clauses in the secondment agreement dealing with duties and obligations of seconded employee as well as clause relating to indemnification are out of place in a contract for providing technical services and held that the payment does not represent fee for technical services

Service PE

Cholamandalam General Insurance – Bangalore Tribunal

Reimburses part of the salary and other benefits payable to the seconded employee

Nothing payable to the Secondee by Cholmandalam

HMFICL continues to be the employer of the secondee and it continues to pay salary to the employee.

The secondee has no right or authority to conclude any contract on behalf of the recipient. HMFICL has been deducting tax from the salary payable to the seconded employee and such tax has been deposited with the Income-tax Department in India

Service PE 83

Secondment agreement to depute employees for two years

Amount paid to HMFICL is not in the nature of income

Cholamandalam is not required to deduct tax on such amounts

The Indian company supervised and controlled the day to day working of the seconded employee and hence was the real and the economic employer

The amount paid was in the form of reimbursement of salary costs and not as fees for technical services

Act under supervision and control of Cholamandalam


Secondment of personnel – existence of service PE • Secondment of personnel should not trigger a service PE as the company in the home country is not providing any services except for the payment of salary. • Further, in secondment agreement, the employer employee relationship is transferred to the company in the host country. • In such a case, the company in the home country is not responsible for any of the services of the company in the host country and hence no service PE can arise.

Service PE

Doctrine of updating construction - preparatory and auxiliary services • Can the exclusion available for preparatory and auxiliary services be extended to service PE by applying the doctrine of updating construction?

Service PE 84


Morgan Stanley – Facts of the case DIT vs Morgan Stanley and Company Inc (SC) [292 ITR 416]

•Morgan Stanley & Co (MS & Co) has a wholly owned subsidiary in India, Morgan Stanley Advantage Services Pvt Ltd (MSAS) Stewards – to ensure high standards of the quality of the services are met

•MSAS provides support to the group’s front Deputees–on request of MS India to work for MS India

office and infrastructure unit functions in their global operations

•Pursuant to an agreement with MSAS, MS & Co proposed to send its employees/ personnel to India

– for stewardship and other similar activities

– deputation of personnel to MSAS to

Arms’ length remuneration at cost plus 29% (TNMM)

work under the control of MSAS and substantively perform functions within the capacity of MSAS’s staff

Service PE

Morgan Stanley – SC Ruling

Stewardship Activities Do not create a PE. • The employee’s presence in India is to ensure that the high standards of quality of the services are maintained

Deputation of employees

Attribution of profits

PE is triggered since :

• No further profit is to be

• MSAS would be responsible for the work of the deputed employees;

• Employees continue to be on the payroll of MS & Co; or

• Employees continue to have lien on their employment with MS & Co

Service PE 85

attributed to the PE so long as MSAS is remunerated at arm’s length


Morgan Stanley decision - relevance • Decision cannot be understood in isolation. • The observations of the Supreme Court that mere deputation would result in a service PE in India due to the presence of lien on employment needs to be examined on overall facts of the secondment agreement.

Service PE

TP Issues in a Downturn Economy.

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Contents

How Does Economic Downturn Affect Business Impact on Transfer Pricing: Key Issues and Proactive Defensive Strategies Impact on Indian Captive Service Providers Defensive Strategy in India International Tax Authorities’ Reaction to Downturn

How does economic downturn affect transfer pricing

87


Economic Downturns Create Business Issues • Operating Losses • Excess/Obsolete Inventory • Cash Flow and Debt Service Constraints • Credit Crunch reduction in liquidity reduction in leverage; and increase in interest rates • Restructurings and Store Closings • Industry Consolidation TP issue in downturn economy

Impact on transfer pricing : Key issues and proactive defensive strategies

88


Transfer Pricing Challenges • Creation of loss pockets Some jurisdictions may have losses while others have taxable profits, deteriorating cash tax position

• Difficulties with implementing transfer pricing policies based on TNMM/CPM methods • Effect of Restructuring Costs Treatment of Costs Arising out of Headcount Reduction Closure and Consolidation of plants and facilities

• Cash Flow and Debt Service Constraints • Losses may lead to valuation allowances and adverse impact on Effective Tax Rates • Increasing Transfer Pricing Audit Risks TP issue in downturn economy

Creation of Loss Pockets – Proactive Strategies

Understand the rationale behind uneven performance :

For short-term issues consider changes to current transfer pricing or subsidy mechanism

Decide whether this is a temporary or longer-term issue

For longer-term issues, consider conversions:

Adverse local market conditions or structural issues

"Market share strategy" under the U.S. regulations

Convert into limited risk distributor or contract / toll manufacturer

Transfer pricing not quite right

Similar market support arrangements for non-U.S. transactions

Exit taxes / fees may be lower in economic downturns

TP issue in downturn economy 89


Transfer Pricing Policies Based on TNMM/CPM Methods- Proactive Strategies Background : You are updating documentation for a client and have historically used a CPM/TNMM. Upon updating the comps, you find that the tested party is no longer in the range. Action Steps Step # 1

Consider Adjustments to the Existing Comparables

Step # 2

Consider Adjustments to the Tested Party Results

Step # 3

Changes to the comp set or most appropriate method. Perform a new search to pick up more comparables (a global set or an APAC set?). Consider changing the testing methodology (CUP, gross margin, modified RPM, unspecified, etc.) Need to develop the client’s story very carefully

Step # 4

Other options (Prepare a planning report with no tested party data?)

TP issue in downturn economy

Adjustments in Comparables During Recession • Sales decline is the only truly independent factor available to us that is closely correlated with firm profitability (see “Firm Profitability in Recessions,” Aydin Hayri & Dick Clark, Transfer Pricing Report, BNA, March 6, 2002 and May 1, 2002). Following steps would be appropriate in the order of decreasing acceptability: Use sales decline as a strong comparability criteria to refine your comparable set. This would eliminate comparables that do not seem to be affected by recession. This would work better for larger comparable sets Extend comparables data to all years of available data and seek periods with significant organic sales declines. Data points for each company from years when they experienced significant sales declines may be used Extend the comparable set to broader industries to find more comparables that had experienced organic sales declines.

TP issue in downturn economy 90


Adjustments in Comparables During Recession – cont’d

Use “pooling” of data from individual years rather than averaging for each comparable.

Conduct a statistical analysis of the relationship between sales growth and profitability in your industry to estimate how much profit margin is lost for each percentage point decline in net sales Use the coefficients from the statistical analysis to adjust comparables’ profit margins to the level of tested party’s sales decline.

TP issue in downturn economy

Adjustments in Comparables During Recession – cont’d Working Capital Adjustments

• Rationale – differences in credit period allowed to buyers levels of inventory holding credit period granted by suppliers

• Above factors create differences between interest expense of tested party and comparable(s) Risk Adjustments

• Types - market risk, credit risk, policy risk, product liability risk, foreign exchange risk, technology risk etc • Relevant for benchmarking for captives • Adjustment methodology based on Capital Asset Pricing Model

Other Adjustments

• Equipment failure/inefficiency • Contractual terms • Geographical/market

List of adjustments is not exhaustive

• Possible to design new adjustments to suit any set of proposed comparables for example adjustment for capacity under – utilization

TP issue in downturn economy 91


Potential Adjustments to Tested Party Results 1.

Consider making year end-adjustments to put tested parties back on track/range : Importance of intercompany agreement (terms and conditions) Accounting and tax issues [e.g : Section 92(3) ]

2.

Consider impact of adjustments on PLIs and customs declarations

3.

Consider the impact of previously lodged custom declarations [quantum of the duty paid on imports]

4.

If it is too late to go in for a year-end adjustment , opt for reflecting amended results on the tax returns: Here a note needs to be taken regarding tax authorities treatment of downward vs. upward adjustments

TP issue in downturn economy

Restructuring Costs •

Any restructure or closure should be supported by valid economic substance

One of the major dilemmas is accounting for deductions in relation to restructuring costs

It brings us to the question of “How do we analyze them”?

A. Start with intercompany agreements and transfer pricing policy B. Examine allocation of functions and risks C. Determine which entities stand to benefit from restructuring D. Loss planning could include a review of location for projected losses E. Full risk companies should prefer Profit Split for fairer outcome F. “Cherry Picking Approach” should be avoided as it may not prevent escaping transfer pricing adjustments

TP issue in downturn economy 92


Planning: Review of Intra-Group Funding

Eliminate inefficient cross-border intra-group loans

Re-assess intra group balances to confirm arm's length terms

Re-assess benchmarkin g of an arm's length interest rate

Tax authorities are likely to apply more conservative basis for leverage due to liquidity problems

Review thin capitalisation position/cover nants in overseas subsidiaries

TP issue in downturn economy

Planning : Tax Value of Intra-Group Debt •

Higher price for risk could increase interest expense, and so increase the tax value of intra-group financing – both inbound and outbound

Determining price for Debt

A. Rating estimation models can be used to estimate the price for intra-group debt B. With a rating, arm’s length interest rates can be found using publicly available bond data C. Determine defensible cross-border interest rate policies D. Help price loan guarantees E. Provide the documentary support required to help avoid penalties F. Provide analytical support for advance ruling applications

TP issue in downturn economy 93


Impact on Indian captive service provider

Using the Recession for Changing TP Policies • If an Indian entity is a captive service provider, can the markups be revised downward because of the downturn? – General opinion is “no” as the entity could no longer be treated as “risk free”, but it depends on facts and circumstances of each case. – In certain cases the markups can be downgraded owing to the fact that the comparables might also have undergone such downward correction in their margins Helpful if renegotiation clauses are built into the intercompany agreement Risk bearing entities can avail of this argument

TP issue in downturn economy 94


Indian Tax Authority’s Perspective • Indian subsidiaries of foreign multinationals have often being regarded by foreign parents as performing routine functions • Indian revenue authorities face the pressure budget shortfalls • Indian authorities will generally resist TP adjustments to have the Indian entities share the pain where traditionally such entities have not shared the gains (on account of economic expansion)

TP issue in downturn economy

Defensive strategy in India

95


Defensive Strategy in India Prepare meticulous contemporaneous TP documentation Should be in a position to convince the examiner that operating results are NOT the result of poor transfer pricing

Focused and refined selection of comparables

It is also important to manage discussions with and responses to tax authorities on lines of the following: Adjust by taking help of the company's spokesperson to explain business conditions that impact TP Document internal decision making Projections of future situations should be documented for planning purposes

TP issue in downturn economy

International tax authorities' reaction to downturn

96


International Tax Authorities • Treasuries around the globe are facing huge budget shortfalls which are strong incentives for them to challenge multinational corporations on their transfer pricing arrangements. This may be illustrated by the following examples: – The IRS (USA) announced a dramatic increase in its budget for transfer pricing enforcement and has begun aggressively hiring transfer pricing economists. – China’s State Administration of Taxation (SAT) issued new regulations on 8 January 2009, for the first time detailing disclosure requirements for multinational companies that do business in China. The SAT grew its revenues from transfer pricing cases by $110m in 2008. – The Canada Revenue Agency (CRA) has more than 400 employees devoted purely to examining transfer pricing and tax haven issues. The CRA has used these massive enforcement resources to become one of the most aggressive transfer pricing auditors in the world. – In 2008, The National Audit Office in the UK released a report estimating that international and transfer pricing risks accounted for over one-third of corporate tax under consideration by the UK tax authorities.

TP issue in downturn economy

Conclusion • The overall conclusion is that companies involved in cross-border related party transactions need to be careful with regard to possible scrutiny of their transfer pricing arrangements and plan for potential adverse consequences to their tax planning structures.

TP issue in downturn economy 97


Expatriate Taxation By Amitabh Singh, Partner, Ernst & Young Private Limited, Gurgaon

Expatriates taking up employment in India will be subject to comprehensive tax, employment, visa rules. In particular, there are not only many planning opportunities but also very many issues. This topic is very relevant for both persons in practice and industry for it will enrich the scientific debate and also help practitioners and companies to find their way through the related legal aspects.

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Gurbachan Singh Gurbachan Singh is a LL.B (Hons) (Singapore); Trust and Estate Practitioner (TEP) He is the Senior Partner, Tax & Trusts of Khattar Wong, Singapore Gurbachan Singh continues to be actively involved in tax work after more than 30 years. His practice revolves mainly around revenue law and trust matters. He is the Honorary Tax Advisor to the Real Estate Developers' Association of Singapore (REDAS). Gurbachan is also a member of the UK Society of Trust and Estate Practitioners (STEP). Additionally, Gurbachan is a Member of the Revenue Chamber of the Editorial and Research Committee of the Malaysian Institute of Taxation. He is also a Director of the Tax Academy of Singapore and Singapore Institute of Taxation. Gurbachan is regarded as one of Singapore's leading tax lawyers and is consistently ranked highly in legal publications such as Asia Pacific Legal 500, Asian Legal Business and PLC Which Lawyer.

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OFFSHORE FINANCIAL CENTERS, TAX HAVENS AND THE OECD GURBACHAN SINGH Senior Partner, Tax INTERNATIONAL FISCAL ASSOCIATION (4 TH CONFERENCE) 21 – 22 AUGUST 2009

WHAT LED TO THE OECD? • After World War II, the US was the only major power whose infrastructure was not significantly harmed. • It was thus in the position to provide aid to Europe. • To help rebuild Europe, the US came up with the Marshall Plan to provide aid to Europe. • Countries in Europe formed the Organisation for European Economic Cooperation (‘OEEC”) to coordinate the distribution of US aid. • The Marshall Plan erased trade barriers and encouraged economic coordination on a continental level.

100


• The OEEC was renamed the OECD in 1961. • The OECD is an organization consisting mainly of developed countries. • Aim – To help its Member States: – Economic growth, – Increasing employment, – Raising standard of living, – Maintaining financial stability.

• Australia, Austria, Belgium, Canada, Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Italy, Japan, Korea, Luxembourg, Mexico, the Netherlands, New Zealand, Norway, Poland, Portugal, Slovak Republic, Spain, Sweden, Switzerland, Turkey, United Kingdom, United States. • Missing – Emerging Giants – China and India

101


MODEL TREATIES • OECD Model Treaty – Purpose: to reduce multiple taxes suffered by member states corporations in the various countries they were doing business in. – Predominant model that is used

• UN Model Treaty – Introduced as an alternative for less developed countries to adopt as acknowledgement that the OECD model was more suitable for developed countries

• Since the developed country wields greater influence in negotiations, the OECD model is usually adopted is adopted instead of the UN model.

WHAT IS A TAX HAVEN? •

The OECD relies on four key factors to determine if a jurisdiction is a tax haven:

A jurisdiction that imposes no or nominal taxes

A lack of transparency

Laws or administrative practices that prevent the effective exchange of information for tax purposes with other governments on taxpayers benefiting from no or nominal tax

The absence of a requirement that the activity be substantial

102


WHAT IS AN OFFSHORE FINANCIAL CENTRE (OFC)?

• The OECD defines OFCs as: – “Countries or jurisdictions with financial centres that contain financial institutions that deal primarily with non-residents and/or in foreign currency on a scale out of proportion to the size of the host economy. Non-resident-owned or -controlled institutions play a significant role within the centre. The institutions in the centre may well gain from tax benefits not available to those outside the centre.”

TAX HAVENS AND OFCS

103


THE PROBLEM WITH THE OECD KEY MEMBER STATES • High Spending • Increase in social spending 18% to 39% (100% increase)

France Germany U.K. U.S.

22% to 35% (60% increase) 16% to 26% (62% increase)

20 05

20 02

20 00

13% to 20% (53% increase)

19 90

19 80

45 40 35 30 25 20 15 10 5 0

MID-1990S SOCIAL EXPENDITURE AS A PERCENTAGE OF GDP

• • • •

France : 28.6% Germany : 26.5% UK : 20.2% USA : 15.3%

Singapore: 1.75%!

104


NATIONAL (INDIVIDUAL) SAVING RATE 20

As a % of their income

15 France Germany U.K. U.S.

10 5 0 1970

1980

1990

2000

2006

A COMPARISON : NATIONAL SAVINGS RATE IN 2000 • • • • • •

Singapore – 38% China – 31% Hong Kong – 20% South Korea – 19% Japan – 13% India – 23%

• • • •

Source: World Resource Institute, Earth Trends

105

France – 10.5% Germany – 6% UK – 4% US – 7%

17.3% to 6.6% 19.7% to 9.8% 14% to 4.5% 9.5% to 2.1%


PRINCIPLE OF TAX NEUTRALITY • Tax neutrality is achieved where the structure of the business is not driven by tax considerations. • Under ceteris paribus conditions, businesses should make business decisions on economic factors since tax costs are in relative concert. • Jurisdictions which offer inappropriate tax conciliations compromise tax neutrality.

OECD’S COUNTER-MEASURES • Stop the outflow of funds, and • Increase the inflow of funds • How? – attacking tax havens and OFCs by: • Level the Playing Field through Tax Harmonisation • Exchange of Information

106


(1) LEVEL PLAYING FIELD THROUGH TAX HARMONISATION - FAILED

• 1998 OECD Report: harmful tax competition caused by low tax jurisdictions • Suggested reviewing access of banking information of foreign nationals • If adopted, level playing field will result for information exchange

• Failed because of enforcement difficulties. • OECD addressed only tax aspect of inequality; failed to consider other inequalities like natural resources, infrastructure and quality of human capital • Therefore, the concept of Level Playing Field was inherently flawed

(2) EXCHANGE OF INFORMATION – ARTICLE 26 • The 2000 OECD Report – focused on the impediments to international cooperation to facilitate the exchange of information in low tax jurisdictions. • All OECD countries should permit tax authorities to access bank information for tax purposes. – Why? Aversion to their nationals transferring funds offshore to low tax states – Could not prevent outflow of funds – Next best option – Information Exchange notwithstanding domestic confidentiality laws.

107


CARTEL? •

High spending developed countries needed funds to maintain their excesses. Countries pursuing their residents who had parked money offshore to escape high tax burden. Banking secrecy laws - a hindrance. Drawba–cks

• • • – – – –

Detriment to world economy as tax rates artificially maintained Tax competition removed – nationals will be highly taxed in own countries Disincentivise investors from investing in attractive jurisdictions/ Pronouncements that exchange will be on a selective basis is hollow

ARTICLE 26 • 1963 – Information to be exchanged where it is required under both the treaty and domestic laws of Contracting States. • 1977 – Information to be exchanged where it is required either under the treaty or under the domestic laws of Contracting States. The information exchanged may be used for the assessment, collection, enforcement, prosecution or determination of tax purposes. • 2005 – Information to be exchanged where it is “foreseeably relevant” under the treaty or under the domestic laws of Contracting States. Additionally, where information has been requested, it is to obtained even though the requested state may not require such information for its own tax purposes. It may not decline to supply information solely due to a lack of domestic interest in such information. Confidentiality laws such as banking secrecy laws shall also not prevent the supply of such information.

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Article 26 •

The competent authorities of the Contract States shall exchange such information as is foreseeably relevant for carrying out the provisions of this Convention or to the administration or enforcement of the domestic laws concerning taxes…”

Any information received ….. shall be treated as secret in the same manner as information obtained under domestic laws…. and shall be disclosed only to persons or authorities … concerned with assessment of collection of, the enforcement or prosecution in respect of, the determination of appeals in relation to taxes …. or the oversight of the above ….

In no case shall the provisions of paragraphs 1 and 2 be construed so as…(b) to supply information which is not obtainable under the laws or in the normal course of the administration of that or of the other Contracting State…

If the information is requested by a Contracting State in accordance with this Article, the other Contracting State shall use its information gathering measures to obtain the requested information, even though that other State may not need such information for its own tax purposes. The obligation contained in the preceding sentence is subject to the limitations of paragraph 3 but in no case shall such limitations be construed to permit a Contracting State to decline to supply information solely because it has no domestic interest in such information.

In no case shall the provisions of paragraph 3 be construed to permit a Contracting State to decline to supply information solely because the information is held by a bank, other financial institution, nominee or person acting in an agency or fiduciary capacity or because it relates to ownership interest in a person.

COMMENTS ON THE CURRENT VERSION OF ARTICLE 26 OF THE OECD MODEL •

“Foreseeably relevant” versus “necessary” – The intention was to broaden “to the widest possible extent” the scope of exchange of information. However, there are limits. “Fishing expeditions” are not allowed nor can a state request for information that is “unlikely to be relevant to the affairs of the taxpayer”.

Disclosure to oversight bodies – Paragraph 2 of Article 26 provides that exchanged information may be disclosed to oversight bodies. – Such a provision may pose a serious risk as oversight bodies may cause information to be released to parties which are not entitled to access to such information

Absence of domestic interest tax – This offers an important guarantee to the effectiveness of exchange of information

Bank and Trust secrecy – This prevents states from declining requests for information held by banks or fiduciaries

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SINGAPORE – INCOME TAX (AMENDMENT) (EXCHANGE OF INFORMATION) BILL •

Singapore has recently tabled the Income Tax (Amendment) (Exchange of Information) Bill to comply with OECD standards.

The proposed amendments do not apply to all double taxation agreements (“DTA”) entered into by Singapore.

They only apply where: – There is an Exchange of Information provision in the DTA; – and – It is declared by the Minister as a “prescribed arrangement”.

Even if the Bill applies: – it may be subject to conditions, exceptions or qualifications; and – the Minister has the power to vary or revoke such declaration.

What is the scope of information exchange?

Singapore is to exchange of information concerning “tax positions” of persons.

Broad definition of “tax position” has the following results: – the Comptroller may gather information which it has NO interest in, for the SOLE purpose of providing it to the DTA country; – no limitation as to period of person’s tax liability: • any person’s past, present and future liability to pay any tax; and • even where the company has ceased to exist or if the individual has died. What happens to secrecy and confidentiality? Previously: Section 65B(2) of the Income Tax Act used to preserve secrecy and confidentiality laws: “No person shall by virtue of this section be obliged to disclose any particulars as to which he is under any statutory obligation to observe secrecy.” e.g Section 47 of the Banking Act Now: Section 6 of the Income Tax Act (Official Secrecy) disregarded the Comptroller may disclose information regarded as secret and confidential under the Act. Power to obtain information “[n]otwithstanding any obligation as to secrecy imposed under any written law or rule of law”

110


However, information protected by banking secrecy and trust confidentiality laws cannot be disclosed except by order of the High Court.

The Comptroller may apply to court for an order to compel the release of restricted information protected under Section 47 (Banking Secrecy) of the Banking Act (Cap. 19) and Section 49 (Trust Confidentiality) of the Trust Companies Act (Cap. 336).

Is there any information that is protected from disclosure?

Yes. Information protected by legal privilege shall not be disclosed. – A Court shall not make an order to compel disclosure of information which is subject to legal privilege – Section 105I(3). – Even if the Court gives an order for information to be disclosed, Section 105J(4) of the Bill provides that if such information is subject to legal privilege, it does not have to be disclosed. What types of information does legal privilege protect? There are 2 types of legal privilege under the common law: 1) legal advice privilege 2) litigation privilege Legal advice privilege protects communications or documents between a client and his lawyer made for the purposes of legal advice.

Litigation privilege attaches to any communications or documents prepared predominantly for the purpose of use in litigation.

How can the Comptroller obtain information?

Information which formerly could not be obtained can now be acquired for foreign tax offences by using the existing information gathering machinery. –

Section 105I allows the Comptroller to apply to Court for an order to compel disclosure of information protected by banking secrecy or trust confidentiality laws if the exchange of such information is required under a prescribed arrangement.

What are the safeguards against unwarranted disclosure? Close monitoring of requests and disclosures: Only the Comptroller can receive requests and to disclose requested information.

111


• All requests must set out the information prescribed in the Eighth Schedule UNLESS the Comptroller permits otherwise. – This serves to prevent “fishing expeditions”. – Also ensures that the requesting country uses all means available in its own territory (unless it causes disproportionate difficulties) before sending a request.

• The Attorney-General can prevent disclosure of information by withholding consent to the Comptroller’s application for an order. • The court can only make an order for disclosure if it is satisfied that: – – – –

1) there is justification for disclosure; 2) legal privilege is not compromised; and 3) disclosure is not contrary to public interest. [See: Section 105I(4)]

Singapore-India Double Tax Agreement Article 28 - Exchange of Information – Allows for exchange of information between the Competent Authorities, upon request. – A Contracting State is not under an obligation to supply information if it is not obtainable under domestic law. – Under the 2005 Protocol, it was clarified that Article 28 makes it mandatory to collect and share information provided the Competent Authority could have obtained that information for its own purpose under domestic law. – Essentially, allows the revenue authorities of Singapore and India to tap each other’s resources to obtain information. – There may be pressures for India and Singapore to update their DTA to bring it in line with the latest trends.

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Exchange of Information - Latest Trends • • • • •

The scope of exchange of information will be broadened. – Foreseeably relevant vs Necessary Exchange of information will take place even if there is no domestic interest for tax purposes in the information. Banking secrecy and trust confidentiality will no longer be available as a basis to decline request for information. Fishing expeditions will not be allowed. Countries will not exchange information if it is contrary to public policy to do so.

• Hitherto, a sovereign state will not enforce the tax laws of a foreign jurisdiction within its own boundaries. Any extra-territorial enforcements is viewed as an extension of foreign sovereign power. • Ponder : • (i) Will the Competent Authority of one jurisdiction effectively assist a foreign sovereign power in enforcing its tax laws by enabling the existing tax machinery in collecting evidence of foreign tax offences? • (ii) How would the latest trends impact bilateral relationships between nonOECD countries? • (iii) What form and shape will future Exchange of Information Article take between non-OECD countries? • (iv) Would the OECD be content with these changes? What happens if the desired results are not met? Will there be further encroachment on a country’s sovereignty?

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THANK YOU GURBACHAN SINGH Senior Partner, Tax KhattarWong DID : (65) 6238 3333 Fax : (65) 6534 1090 Email : guru@khattarwong.com SINGAPORE:

CHINA:

HONG KONG:

VIETNAM:

80 Raffles Place #25-01 UOB Plaza Singapore 048624

Shanghai Stock Exchange Building (South Tower) 528 Pudong South Road #22-06 Shanghai 200120, China

Unit A, 17/F South China Building 1 Wyndham Street Hong Kong

Bitexco Office Building 19-25 Nguyen Hue Boulevard, District 1 Suite 1501, 15th Floor Ho Chi Minh City, Vietnam

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MMag. Sabine Heidenbauer, LL.M.

October 2000

Undergraduate Studies : Business Administration, Karl Franzens University Graz, AustriaLaw, Karl Franzens University Graz, Austria

2003

Harvard Summer University, Cambridge, MA, USA

October 2003

Bachelor of Business Administration Postgraduate Studies : Business Administration – Financial and Industrial Management

April 2004

Master of Financial and Industrial Management (with distinction)

2004 to 2005

Postgraduate Law Studies (LLM) at King´s College London, UK Participant in the Eucotax Wintercourse, Tilburg, NL, for Queen Mary University London (with merit)

October 2005

Resumption of Law Studies at the University of Vienna, Austria

Since October 2005

Assistant Professor at the Institute for Austrian and International Tax Law at the University of Economics and Business Administration, Vienna, Austria

March 2007

European and International Tax Law Moot Court of the European Tax College in Leuven, BE: Award for the Winning Team, Award for the Best Memorandum on behalf of the Defendant

October 2007

Participation in the Poster Programme of the International Fiscal Association (IFA), 61st IFA Congress, Kyoto

January 2008

Magister Iuris

March 2008

Tax Executive Institute European Chapter Award 2008 for the book contribution Heidenbauer/Metzler, National Report Austria, in Lang/Pistone (eds) The EU and Third Countries : Direct Taxation (2007) Freshfields European Prize, Austrian Winner, European Finalist Doctoral candidate in Business Law at the WU Wien, Vienna University of Economics and Business

October 2008 to Research fellow at the Max Planck Institute for Intellectual March 2009 Property, Competition and Tax Law in Munich, Germany From May 2009

DOC fellowship of the Austrian Academy of Sciences

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ENTERING EUROPE : THE FREE MOVEMENT OF CAPITAL 4th Annual Conference of IFA India (SR) Chennai, 22 August 2009 Sabine Heidenbauer

Institute for Austrian and International Tax Law • www.wu.ac.at/taxlaw

Agenda l

Legal framework and Court practice l l l l l l

l

The fundamental freedoms of the EC Treaty The scope of Art. 56 EC (free movement of capital) A life in shadows: primacy of the freedom of establishment Narrowing the scope of the free movement of capital Residual applicability of the free movement of capital The ECJ’s multi-step test

Case studies

Institute for Austrian and International Tax Law • www.wu.ac.at/taxlaw

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LEGAL FRAMEWORK AND COURT PRACTICE

Institute for Austrian and International Tax Law • www.wu.ac.at/taxlaw

The fundamental freedoms of the EC Treaty Arts. l Arts. l Arts. l Arts. l

l

39-42 43-48 49-55 56-60

EC: free movement of workers EC: freedom of establishment EC: freedom to provide services EC: free movement of capital (and payments)

compare with Art. 24 OECD MC

Institute for Austrian and International Tax Law • www.wu.ac.at/taxlaw

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The scope of Art. 56 EC l

Art. 56.1 EC: „… all restrictions on the movement of capital between Member States and between Member States and third countries shall be prohibited.”

l

Capital movements → nomenclature of Annex I to Directive 88/361/EEC (non-exhaustive) l l l l l

direct investments investments in real estate operations in securities normally dealt in on the capital market operations in units of collective investment undertakings personal capital movements ...

Institute for Austrian and International Tax Law • www.wu.ac.at/taxlaw

A life in shadows: primacy of the freedom of establishment Freedom of establishment l

Art. 43.1 EC:„.... restrictions on the freedom of establishment of nationals of a Member State in the territory of another Member State shall be prohibited."

l

Art. 48.1 EC: „Companies or firms formed in accordance with the law of a Member State and having their registered office, central administration or principal place of business within the Community shall ...be treated in the same way as natural persons who are nationals of Member States."

Institute for Austrian and International Tax Law • www.wu.ac.at/taxlaw

118


A life in shadows: primacy of the freedom of establishment Parallelism or mutual exclusivity? l

Art. 43.2 EC: „Freedom of establishment shall include the right to take up and pursue activities as selfemployed persons and to set up and manage undertakings … under the conditions laid down for its own nationals by the law of the country where such establishment is effected, subject to the provisions of the Chapter relating to capital.”

l

Art. 58.2 EC: „The provisions of this Chapter [n.b.: fmoc] shall be without prejudice to the applicability of restrictions on the right of establishment which are compatible with this Treaty.” Institute for Austrian and International Tax Law • www.wu.ac.at/taxlaw

A life in shadows: primacy of the freedom of establishment The „unavoidable consequence” l

Convergence of the fundamental freedoms

l

The ECJ’s „principal aspect” jurisprudence (rather than parallel applicability) l l l l l l l

l

C-196/04 C-452/04 C-492/04 C-524/04 C-102/05 C-284/06 C-415/06

Cadbury Schweppes, para. 33: establishment (intra-EC) Fidium Finanz, para. 48: services (third country) Lasertec, para. 25: establishment (third country) Thin Cap Group Litigation, para. 34: establishment (intra-EC) A and B, para. 27: establishment (third country) Burda, para. 74: establishment (intra-EC) SEW, para. 16: establishment (third country)

Benchmark: factual or legal?

l C-157/05 Holböck → no final answer (para. 31: „ even if” ) l C-284/06 Burda → factual (paras. 68 et seq.)

Institute for Austrian and International Tax Law • www.wu.ac.at/taxlaw

119


Narrowing the scope of the free movement of capital Art. 57.1 EC: pre-1994 restrictions l

l

l

temporal element l

date of reference: 31 December 1993

l

irrelevance of date of accession

l

post-1993 amendments to restrictive provisions?

substantive element l

direct investment

l

national legislation need not specifically target third country-situations

case law [and missed chances] C-446/04 FII Group Litigation [C-492/04 Lasertec]

C-101/05 A C-157/05 Holböck

C-194/06 OESF [C-415/06 SEW]

Institute for Austrian and International Tax Law • www.wu.ac.at/taxlaw

Residual applicability of the free movement of capital Is the national provision targeted at controlling shareholdings? no

yes Exclusive applicability of Art.43; no protection of third country situations

In principle, Art. 56 and Art. 43 are applicable parallel Is the actual shareholding a controlling shareholding? no

yes

Art. 56 applies to portfolio shareholdings and direct investment which is not, at the same time, a controlling shareholding

Exclusive applicability of Art.43; no protection of third country situations

Provision grandfathered by Art.57 para.1? no Continue with discrimination test (with possibly different comparability, justification, and proportionality test due to third country situation)

yes

No infringement of Art.56

Institute for Austrian and International Tax Law • www.wu.ac.at/taxlaw

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The ECJ’s multi-step test scope of fundamental freedom comparability discrimination/restriction justification proportionality Institute for Austrian and International Tax Law • www.wu.ac.at/taxlaw

The ECJ’s multi-step test: Comparability l

l

Are the internal and the cross-border situation comparable? Vertical (rather than horizontal?) pair of comparison MS1

MS1

MS1

MS1

MS2 TC1

MS3 TC2

MS1

MS2 TC1

Institute for Austrian and International Tax Law • www.wu.ac.at/taxlaw

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The ECJ’s multi-step test: Justification and proportionality l l

Art. 58 EC Overriding reasons in the general interest l l l l l

effectiveness of fiscal supervision? loss of tax revenue? anti-abuse? balanced allocation of taxing rights? etc.

Institute for Austrian and International Tax Law • www.wu.ac.at/taxlaw

CASE STUDIES

Institute for Austrian and International Tax Law • www.wu.ac.at/taxlaw

122


Raising capital in the EU (EU shareholders) exempt (conditions apply)

taxed

div. div.

MS

l EU taxpayers discouraged from investing capital in TC companies, shares of TC companies less attractive to EU investors l restriction of free movement of capital l justification possible! l effectiveness of fiscal supervision (compliance with conditions)

l extent of exchange of information TC

l see case ECJ C-101/05 A

Institute for Austrian and International Tax Law • www.wu.ac.at/taxlaw

Providing services in the EU l Third country financial services less accessible for EU clients; clients therefore less inclined to have recourse to those services

TC bank authorisation denied

authorisation granted

l infringement of free movement of capital?

MS

l freedom to provide services (Art. 49 EC) primarily affected

provision of financial services

l potential restriction of free movement of capital is merely „unavoidable consequence

ð no EC Treaty protection l see case ECJ C-452/04 Fidium Finanz Institute for Austrian and International Tax Law • www.wu.ac.at/taxlaw

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Third country-PEs losses not deductible

losses deductible

MS

MS

MS

l Arts. 7, 23 DTC: business profits exempt in State of residence

losses

l infringement of free movement of capital? l freedom of establishment primarily affected: „definite influence” l potential restriction of free movement of capital is merely „unavoidable consequence”

ð no EC Treaty protection TC

losses

l see case ECJ C-415/06 SEW (and also C-293/06 Deutsche Shell for an intra-Community perspective)

Institute for Austrian and International Tax Law • www.wu.ac.at/taxlaw

For your reference l Lang, Michael/Pistone, Pasquale (eds.) The EU and Third

Countries: Direct Taxation , Linde Verlag, Vienna 2007. l Lang, Michael et al. (eds.) Introduction to European Tax

Law on Direct Taxation, Sp iramus Press, London 2008 and Linde Verlag, Vienna 2008.

Institute for Austrian and International Tax Law • www.wu.ac.at/taxlaw

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List of abbreviations Art(s).

Article(s)

div.

dividend

DTC

Double Taxation Convention

EC

Treaty establishing the European Community

ECJ

European Court of Justice

EU

European Union

fmoc

free movement of capital

MS

Member State

OECD MC

OECD Model Convention

para(s).

paragraph(s)

TC

third country (non-Member State)

Institute for Austrian and International Tax Law • www.wu.ac.at/taxlaw

For your reference

INSTITUTE FOR AUSTRIAN AND INTERNATIONAL TAX LAW Althanstr. 39-45, 1090 Vienna, Austria

MMAG. SABINE HEIDENBAUER, LL.M. T +43-1-313 36-4280 F +43-1-313 36-730 sabine.heidenbauer@wu.ac.at

Institute for Austrian and International Tax Law • www.wu.ac.at/taxlaw

125


Bart Kosters Bart Kosters is currently Team Manager of the IBFD Topicals Knowledge Group and was the Head of the IBFD Asia-Pacific Research Team until August 2005. After obtaining his master’s degree in Law from the State University of Leiden in 1988, Mr Kosters started working in the tax administration where he successfully completed the postgraduate programme for tax inspectors. From 1992 to 2001, he was a senior staff member at the Dutch Ministry of Finance where he was responsible for tax treaty negotiation and application as well as for drafting direct tax legislation. Since 2006, he is also the Key Expert Taxation in the European Technical Assistance Programme for Vietnam (ETV2). Furthermore, he is a permanent contributor on international tax matters for a leading weekly tax magazine in the Netherlands and is a regular speaker at tax conferences.

126


Triangular Cases in Tax Treaties Bart Kosters IBFD The Netherlands

Chennai, 22 August 2009

International Bureau of Fiscal Documentation - www.ibfd.org

Topics • What are triangular cases? • Types of Triangular Cases • 1. Head Office with Permanent Establishment receiving income that is attributable to the PE to a resident of a third State; • 2. Head Office with Permanent Establishment paying income that is attributable to the PE to a resident of a third State; • 3. Dual resident company receiving income from a third State • 4. Dual resident company paying income to a resident of a third State © 2009 IBFD

127


What are Triangular Cases?

• IBFD’s International Tax Glossary: • “Term used most commonly in the context of relieving double taxation where more than two (typically three) states are involved. For example, a resident of one state (State R) has a permanent establishment in another state (State P), which in turn derives income in the form of dividends, interest or royalties from a third state (State S), thus raising the issue (if double taxation treaties have been concluded between the states) which tax treaty should be applied to relieve double taxation in State S, i.e. should the R-P or the R-S treaty be applied? Triangular cases also arise in the context of imputation systems where shareholders from one country receive dividends from a company resident in another country where the company derives income from the shareholder’s country of residence (e.g. through a permanent establishment or a subsidiary). Various tax planning arrangements have been devised for overcoming problems relating to the granting of imputation credits in such cases, and various techniques are also available to governments wishing to provide relief (sometimes referred to as triangular tax relief).” © 2009 IBFD

Situation 1: HO-PE Receiving Income A

B

company X

PE

interest

payer C

© 2009 IBFD

128


Situation 1: HO-PE Receiving Income A

B

PE

company X

interest

payer C

© 2009 IBFD

Situation 1: HO-PE Receiving Income A

B

PE

company X

interest

payer C

© 2009 IBFD

129


Situation 1: HO-PE Receiving Income A

B

PE

company X

interest

payer C

© 2009 IBFD

Situation 2: HO-PE Paying Income A

B

PE

company X

interest

recipient C

© 2009 IBFD

130


Situation 2: HO-PE Paying Income A

B

company X

PE

interest

recipient C

© 2009 IBFD

Situation 2: HO-PE Paying Income A

B

PE

company X

interest

recipient C

© 2009 IBFD

131


Situation 2: HO-PE Paying Income A

B

PE

company X

interest

recipient C

Š 2009 IBFD

Situation 3: Dual Resident Receiving Income A

B

company X incorporation

place of management interest

payer C

Š 2009 IBFD

132


Situation 4: Dual Resident Paying Income A

B

company X incorporation interest

place of management

recipient C

Š 2009 IBFD

Situation 4: Dual Resident Paying Income A

B

company X incorporation interest

place of management

recipient C

Š 2009 IBFD

133


Situation 4: Dual Resident Paying Income A

B

company X incorporation

interest

place of management

recipient C

Š 2009 IBFD

Situation 4: Dual Resident Paying Income A

B

company X incorporation interest

place of management

recipient C

Š 2009 IBFD

134


Many Thanks!

B.Kosters@ibfd.org

Š 2009 IBFD

135


Triangular Cases in Tax Treaties Bart Kosters

Introduction Almost all double taxation conventions in

Head Office Situations

force are bilateral treaties that have effect on

The first two situations of traingular cases that

the domestic tax systems of the two Contracting States. However, in the real world it is possible

I shall deal with concern a head office in one state with a permanent establishment in another

that more than two States are involved. In this

state that either recieve income from a third

paper, I shall focus on so-called triangular cases

state (situation 1) or that pay income to a

that involve three different States. I shall deal with four different situations which are the

resident of a third state (situation 2)

following:

Situation 1

1.

A Company, resident in State A, has a

In the first situation I shall focus on a company

permanent

that has its head office in one state and that has a permanent establishment in another State.

establishment

in

State

B,

receives income from State C which is attributable establishment; 2.

to

the

–

Permanent

Establishment

This company receives income (in this case

permanent

interest) from a resident of a third State and the interest can be attributed to the permanent establishment.

A Company, resident in State A, has a permanent establishment in State B and pays income to a resident of State C in relation to the activities carried out through the permanent establishment.

3.

A Company, which is a resident of both State A and State B, receives income from State C;

4.

A Company, which is a resident of Both State A and State B, pays income to a resident of State C Assumptions

In all these four situations the question is in

Assume that company X is a resident of State A

how far the domestic legislation of the States involved can be applied and which treaty or

and

that

company

X

has

a

permanent

which treaties limit the application of the

establishment in State B. Assume further that company X receives interest from State C which

domestic legislation. Basic assumptions in this

is attributable to Company X’s permanent

paper is that the OECD Model Tax Convention applies unless otherwise indicated and that the

establishment in State B. Assume also that treaties have been concluded between States A, B and C. If the treaty between State A and State

income received or paid is interest. 136


C provides for source state taxation on interest at a rate of 10 per cent while the tax treaty

the gross amount of the interest payment. Depending on the system in force in State C, the

between State B and C only allows taxation up

10 percent rate applies directly, or Company X

to 5 per cent of the gross amount of the interest,

is confronted with withholding tax according to

what are the consequences for States A, B and C? The domestic tax system of State C provides

the domestic rates and should apply for a refund of the tax that has been withheld in

for a withholding tax of 10 per cent of the gross

excess of the maximum provided for in the tax

amount of the interest. In my answer I shall

treaty.

start with the position of State C and subsequently I shall address the taxation in

State B

States A and B.

The first comment that should be made is that because of the Persons Covered article in the tax

State C

treaty between states B and C2, that treaty is not

The payer of the interest is a resident of State C and is obliged to withhold tax on interest paid

applicable since the permanent establishment of company X in State B does not qualify as a

to Company X. To determine how much tax (5

person who is a resident of State B3. The

or 10 percent) should be withheld, we have to

permanent establishment itself is not a separate

look at the interest article in the State C tax treaties with States A and B. If – apart from the

legal entity and is therefore not a person as meant in Art. 3, paragraph 1, subparagraph a,

percentage mentioned in paragraph 2 – the

OECD Model Tax Convention.

interest Article in the treaties are identical to the wording of the OECD Model Tax 1 Convention , we can conclude that the A-C tax

The interest received is attributable to the permanent establishment of Company X in State

treaty is to be applied since Company X is a

B. If the attribution rule regarding business

resident of State A and is receiving interest from State C. The B-C tax treaty on the other hand

income in the A-B treaty is similar to Art. 7

cannot be applied since neither company X nor

OECD Model Tax Convention, State B may tax the income that is attributable to the permanent

the permanent establishment of Company X is a

establishment. The provision of paragraph 7 of

resident of State B according to Art. 4 OECD Model Tax Convention. The application of the

Article 7 OECD Model Tax Convention4 will not

A-C treaty implies that the interest receives may

prevent State B from taxing the interest from State C. With respect to the interest received

be subject to tax in State C up to 10 percent of

from State C, the interest article in the A-B tax

1

Art. 11, paragraphs 1 and 2, of the OECD Model Tax Convention are as follows: 1. Interest arising in a Contracting State and paid to a resident of the other Contracting State, may be taxed in that other State. 2. However, such interest may also be taxed in the Contracting State in which it arises and according to the laws of that State, but if the beneficial owner of the interest is a resident of the other Contracting State, the tax so charged shall not exceed 10 percent of the gross amount of the interest. …

2 In the OECD Model Tax Convention, Art. 1 deals with the persons covered. This Art. 1 OECD Model Tax Convention states: "This Convention shall apply to persons who are residents of one or both of the Contracting States." 3 The term "person"is defined in Art. 3, paragraph 1, subparagraph a, OECD Model Tax Convention as follows: "the term "person" includes an individual, a company and any other body of persons". 4 Art. 7, paragraph 7, OECD Model Tax Convention states: "Where profits include items of income which are dealt with separately in other Articles of this Convention, then the provisions of those Articles shall not be affected by the provisions of this Article."

137


treaty is not applicable5. The only possibility would be the other income Article in the A-B

much foreign tax can be credited against the State B tax.

tax treaty. If this Article is similar to Art. 21 OECD Model Tax Convention, it contains in

From the facts of the example we know that the

paragraph 2 a provision that refers back to the business profits Article (Art. 7 OECD Model Tax

A-C treaty allows State C to levy a tax of 10

Convention). Therefore, State B may include in

percent of the gross amount of the interest, whereas this is 5 percent under the B-C treaty.

the

permanent

Does the application of the non-discrimination

establishment the interest received from State C.

article require State B to give a credit for 10

The next question is whether State B is obliged

percent (the actual tax withheld) or just 5 percent (the withholding tax that domestic

to grant a foreign tax credit for the tax withheld

enterprises can credit)? In my view, Art. 24,

in State C. Since the p.e. is not a resident of

paragraph 3, OECD Model Tax Convention only

State B, the article on the avoidance of double taxation (Art. 23 OECD Model Tax Convention)

obliges to the latter7.

in the tax treaty between States B and C is not

State A

applicable. However, the non-discrimination

From Article 11 from the A-C Tax Treaty we

article in the A-B tax treaty might be of help here. If the non-discrimination article of that A-

have seen that State A is entitled to tax the interest received from State C. Since there was

B treaty contains a provision similar to Art. 24,

also a limited taxation right for State C, under

paragraph 3, OECD Model Tax Convention, the

the elimination of double taxation article from

taxation of the permanent establishment in State B may not be less favourably levied compared to

the A-C tax treaty, State A is obliged to grant a foreign tax credit for the tax levied in State C.

enterprises resident in State B. Enterprises

The elimination of double taxation article in the

resident in State B and receiving interest from

A-C treaty obliges State A to give a so-called

State C are entitled to a foreign tax credit. Therefore, it could be said that in principle also

ordinary credit for the tax levied in State C. This means that the actual tax paid in State C is

the permanent establishment should be entitled

the starting point but the foreign tax credit is

to such a credit. In this respect it should be

restricted to the amount of tax payable in State

mentioned that there is an ongoing debate as to the extent of Art. 24, paragraph 3, OECD Model

A on the interest derived from State C.

Tax Convention and especially whether this

From the facts of the case we know that the

provision would only lead to intitlement to a

interest

foreign tax credit under the domestic legislation of State B or that also credit under treaties

permanent establishment of Company X in State

taxable

income

of

the

received

is

attributable

to

the

should be granted6. Furthermore, there is an

B and also that a tax treaty applies between States A and B, which grants State B the right to

important complication which deals with how

tax the income that is attributable to the

5

The interest article in the A-B tax treaty only applies to interest derived from one Contracting State (therefore State A or State B) by a resident of the other Contracting State (State B or State A). In our case the interest is sourced in State C.

6

Paragraphs 69 through 72 of the Commentary to Art. 24 of the OECD Model Tax Convention deals with this issue

7

Although the Commentary to Art. 24, paragraph 3, OECD Model Tax Convention does not address the issue explicitly, it appears from the suggested provision in paragraph 70 that the OECD takes the same view.

138


permanent establishment in State B. As we have seen before, State B is obliged to grant a

Credit method

credit for (part of) the tax withheld in State C.

the credit method, it will grant a deduction for

When State A avoids double taxation through the foreign tax on the income from sources

Therefore,

the

issue

is

whether

the

tax

outside State A. In the example that we are using, the interest received was subjected to a

withheld by State C can also be credited in State A, either wholly or partly. The answer to this issue

10 percent withholding tax in State C. The

depends to some extent to the

interest is also included in the profits of the p.e.

method used by State A to eliminate double

that were taxed in State B. State B granted a foreign tax credit up to 5 percent of the gross

taxation with respect to business profits. I will first address the exemption method and

amount of the State C interest. When the tax rate

thereafter the credit method.

in State B is lower than that of State A, there

Exemption method

might be a possibility to claim a credit for the tax levied in State that could not be credited in

When the interest received from State C is

State B.

attributable to the permanent establishment of Company X in State B, as we have seen before,

Situation 2

State B is entitled to tax the interest as part of the income of the permanent establishment. As

In situation 2 I shall deal with a company

we

non-

establishment that pay interest to a resident of a

discrimination provision regarding the taxation

third state on a loan that can be attributed to the permanent establishment.

have

seen

as

well,

under

the

consisting of a head office and a permanent

of permanent establishments, State B is required to grant relieve for the avoidance of double taxation regarding the tax withheld in State C on the interest paid to company X. Subsequently, State A grants an exemption from its tax with respect to the p.e.-income, which includes the interest from State C. The effect of the exemption method is that State A does not effectively tax the income of the permanent establishment. Since State A does not levy any tax on the p.e.-income including the interest received from State C, the tax paid in State C on that interest cannot be credited against the State C tax8. Some academics take the position that State A would have to grant a foreign tax credit

Assumptions

for the tax withheld in State C. However, in the

Assume that company X is a resident of State A

Netherlands, the Supreme Court decided in two recent judgments9 against a credit in State A.

and that company X has a permanent establishment in State B. Assume further that

8 Under an ordinary credit, the foreign tax credit will be limited to the amount of tax paid on that income in the State of residence. When no tax is due in the state of residence, the foreign tax credit cannot be effected. Depending on the domestic system, the unused foreign tax credit may be carried forward. 9 Supreme Court 8 February 2002, nr. 36 155, BNB 2002/184 and Supreme Court 11 May 2007, nr. 42 385, BNB 2007/230.

139


company X pays interest to a resident of State C and that the loan for which the interest is

State B

paid can be attributed

interest is paid was related to the business of

We have assumed that the loan for which the

to Company X’s

permanent establishment in State B. Assume

the

also that treaties have been concluded between States A, B and C. If the treaty between State A

instance the case when Company X took out a loan with the bank to fund the permanent

and State C provides for source state taxation

establishment in state B.

on interest at a rate of 10 per cent while the tax

interest article in the B-C tax treaty contains a

treaty between State B and C only allows taxation up to 5 per cent of the gross amount of

sourcing rule similar to Art. 11, paragraph 5, OECD Model Tax Convention, under the second

the interest, what are the consequences for the

sentence State B should be regarded as the

tax levied in States A, B and C? In my answer

source state. This means that in State B the

I shall start with the position of State C and subsequently I shall address the taxation in

interest payment may be subjected to a withholding tax of 5 percent of the gross

States A and B. I shall not discuss the issue of

amount of the interest.

whether

the

permanent

establishment

permanent

establishment.

This

is

for

Therefore, if the

has

sufficient free capital or that part of the loan should be considered as free capital.

State A If the interest article of the A-C tax treaty is similar to Art. 11 OECD Model Tax Convention,

State C

the first sentence of the sourcing rule of Art. 11,

According to the tax treaties between States A

paragraph 5, would deem State A to be the source state of the interest. The second sentence

and C and between States B and C, State C has the unrestricted right to tax interest sourced in

of this provision does not alter this since the

State A or State B. Under the elimination of

p.e. is not in State A or State C and State B is

double taxation article State C is obliged to grant a foreign tax credit for the tax paid in the source

not a signatory to the treaty. It seems that the interest is sourced in two states. The A-C treaty

state. The relevant question is therefore on the

therefore allows State A to levy tax at a rate of

one hand which state should be considered as

10 percent of the gross amount of the interest.

the source state regarding the interest payment from Company X to the recipient of the

From paragraph 28 and following of the Commentary to Art. 11 OECD Model Tax

interest10. As will be demonstrated below, both

Convention it appears that the OECD Member

States A and B are entitled to levy tax on the

States decided not to deal with case of dual

interest payment. Under the A-C and B-C tax treaties State C is obliged to grant a tax credit for

source income in the Convention11. However, paragraph 30 of the Commentary to Art. 11 of

the tax paid or withheld in States A and B.

the OECD Model Tax Convention contains a

10

In this example I will not question whether the recipient of the interest can be considered to be the beneficial owner of the interest.

11

Paragraph 29 of the Commentary to Art. 11 OECD Model Tax Convention. According to this paragraph the reason for not aiming at including a solution in the Convention because of fear that the State in which the permanent establishment is situated will not levy any tax on the interest paid.

140


possible solution for dual source income12. Unfortunately, the suggested provision to solve

paragraph 3, OECD Model Tax Convention contains a so-called tiebreaker rule under which

the issue has until not been included in many

the place of effective management is considered

treaties.

crucial13.

Dual Resident Companies Situations

As was mentioned before, dual resident companies have been a popular instrument for

Situations 3 and 4 deal with dual resident

international tax planning purposes. Recent

companies. Dual resident companies are companies that are considered to be a resident

changes to the Commentary to Art. 4, paragraph

of two States. This is possible because of the

3, OECD Model Tax Convention seem to have made to use of dual resident companies

fact that domestic tax systems use different

sometimes a more risky affair14. This is for

criteria for residency. In many states incorporation under the laws of that state,

instance the case when the alternative tiebreaker rule for companies will be included more and more in tax treaties.

implies that the company is considered a resident for CIT purposes. At the same time also many countries use the effective management test or management and control test. Quite often

Situation 3 Situation 3 deals with a dual resident company receiving income (in this example interest) from

dual resident companies are created on purpose for instance to make use of group taxation

a third State.

facilities or to benefit from certain tax treaties. As far as the application of

tax treaties is

concerned, it is important to realize that although differences in domestic legislations make it possible that one and the same company is regarded as resident of different states, for the application of tax treaties a company can only be a resident of one State. To solve the residence issue of dual resident companies, Art. 4,

12

The provision that is suggested is as follows: Where, however, the person paying the interest, whether he is a resident of a Contracting State or not, has in a State other than that of which he is a resident a permanent establishment in connection with which the indebtedness on which the interest is paid was incurred, and such interest is borne by such permanent establishment, then such interest shall be deemed to arise in the State in which the permanent establishment is situated.

13

It is important to stress that unless the domestic legilation provides otherwise, for domestic tax purposes the dual resident company remains also a resident of the Contracting State that lost out in the tiebreaker. In the 2008 Update to the OECD Model, the Commentary to the tiebreaker of Art. 4, paragraph 3, OECD Model Tax Convention was changed significantly. Paragraph 24.1 of the Commentary to Art. 4 was added to the Commentary. This paragrph 24.1 provides for an alternative tiebreaker under which the treaty residence of a dual resident company will be determined by mutual agreement of the competent authorities of the Contracting States. In cases where the authorities are unable to reach an agreement, according to this suggested provision the dual resident company is "not entitled to relief or exemption under the treaty unless agreed upon by the competent authorities of the Contracting States". Similar provisions can for instance be found in tax treaties concluded by Canada. This sanction applies to relief or limitation by both Contracting States.

141


Assumptions Assume that company X is established under

dual resident company) may elect which treaty should be applied or that international law

the laws of State A and has its place of effective

requires the application of the most favourable

management in State B. If the domestic tax laws

tax treaty.

of State A deem company X to be a resident of State A because of its incorporation and the laws of State B consider company X a resident

In the last decades an alternative view emerged. The other view first emerged in case law in the

of State B because of the place of effective

Netherlands15. Later, the US issued regulations

management in State B, the company Is for the application of domestic law a resident of both

which are also based on the other approach. Since the 2008 Update, the Commentary to the OECD Model Tax Convention also indicates that

State A and State B.

the other approach should be followed16. Approach The approach that I refer to is based on the text

If the dual resident company receives interest

of Art. 4, paragraph 1, second sentence, OECD Model Tax Convention. This sentence stipulates

from State C, theoretically two tax treaties are applicable: the A-C treaty and the B-C treaty.

that a person for the purposes of the tax treaty

The question arises which treaty is applicable. The answer to this question becomes more

is not treated as a resident of a Contracting State if that person is liable to tax in that State only in respect of income from sources within that

important when the treaties contain different maximum withholding tax rates. If for instance

State although the person is a resident of that

the tax treaty between States A and C allows the source State (State C) to tax the interest at a rate

State according to the domestic legislation of that State.

of 5 per cent of the gross amount of the interest and the tax treaty between B and C allows the

If there is a treaty applicable between States A

source State to levy tax at a rate of 10 per cent, how much withholding tax should be withheld

and B and the A-B tax treaty contains the tiebreaker rule of Art. 4, paragraph 3, OECD

by the payer of the interest? This question has

Model Tax Convention, the dual resident company will for the purposes of that treaty be

for quite some time led to heated debates. Traditionally many academics and tax practitioners took the view that the tax treaty

considered a resident of the State in which the place of effective management is situated (State

that contained the lowest tax rate should be

B in our case). In this state B the company is taxed on its worldwide income. In the other

applied. However, there was a difference of opinion as to why this would be the case. Is this based on the presumption that the taxpayer (the

State, State A – because of the impact of the A-

14

Supreme Court of the Netherlands, 28 February 2001, nr. 35557, BNB 2001/295.

15

Paragraph 8.2 of the Commentary to Art. 4 OECD Model Tax Convention contains the following sentence: “It (BK: Art. 4, paragraph 1, second sentence, OECD Model Tax Convention) also excludes companies and other persons who are not subject to comprehensive liability to tax in a Contracting State because these persons, whilst being residents of that State under that State's tax law, are considered to be residents of another State pursuant to a treaty between these two States.”

16

Paragraph 8.2 of the Commentary to Art. 4 OECD Model Tax Convention contains the following sentence: “It (BK: Art. 4, paragraph 1, second sentence, OECD Model Tax Convention) also excludes companies and other persons who are not subject to comprehensive liability to tax in a Contracting State because these persons, whilst being residents of that State under that State's tax law, are considered to be residents of another State pursuant to a treaty between these two States.”

142


B tax treaty – the company is only liable to tax in respect of income from sources within that

could be applicable: the A-C treaty and the B-C treaty. The question arises whether both treaties

State. Therefore, due to Art. 4, paragraph 1,

should be applied as was the case under

second sentence, OECD Model Tax Convention,

situation 2 or that just one treaty is applicable.

the company does not qualify as a resident of State A under the A-C tax treaty. It should be

In that latter case the question is then which treaty should be applicable. Below I shall again

stressed that Art. 4, paragraph 1, second

look at the position of the different states. This

sentence, was added to the OECD Model Tax

time I shall start with the effects in State A and

Convention in 1977. Some of the older tax treaties do not contain this second sentence and

thereafter I shall address the consequences for States B and C.

therefore the approach described above does not State A

work.

It is clear that for the purposes of the A-B tax Situation 4 The fourth situation deals with a dual resident

treaty, company X would be considered a resident of State B. Although the tiebreaker in

company paying interest to a resident of a third

principle only applies to States A and B, the

State.

effect is that Company X is taxable in State A only in respect of income from sources in State A and therefore does not meet the residence criterion of Art. 4, paragraph 1, OECD Model Tax Convention. Therefore, based on the new OECD Commentary on dual resident companies and especially the position in the State that lost out in the tiebreaker rule (in our example this is State A), the correct view would be that company X would not be considered a resident of State A for the purposes of the A-C tax treaty. However, this does not per se imply that State A

Assumptions

has no right to impose a withholding tax on the interest paid by Company X. It would be

Assume that company X is established under

possible that company X still has a permanent

the laws of State A and has its place of effective management in State B. If the domestic tax laws

establishment in State A. In that case, it might

of State A deem company X to be a resident of

be possible that the sourcing rule of Art. 11, paragraph 5, OECD Model Tax Convention

State A because of its incorporation and the

deems the interest to be sourced in State A. In

laws of State B consider company X a resident of State B because of the place of effective

that case State would be entitled to levy tax in

management in State B, the company Is a

accordance with the interest article of the A-C tax treaty. However, it is imperative that the

resident of both State A and State B.

loan on which the interest is paid can be attributed to the permanent establishment and

If the dual resident company pays interest to a resident of State C, theoretically two tax treaties

that the interest is borne by the permanent 143


establishment. If these two conditions are not met, State may not levy tax on the interest

foreign tax credit can however not exceed the State C tax on the net income from the loan

payment.

granted to Company X.

State B

Summary and Conclusions

As was mentioned above, under the A-B tax treaty Company X is considered a resident of

Triangular cases comprises various different situations and may involve head offices and

State B and not a resident of State A. Under Art.

permanent establishments on the one hand or

11, paragraph 5 OECD Model Tax Convention,

dual resident companies on the other hand. As

the interest paid by company X is sourced in State B under the B-C tax treaty even if the

we have seen, the various situations may lead to international double taxation. In some of the

interest is paid in respect of a loan that can be

issues the tax treaties more or less provide for

attributed to a permanent establishment of

an adequate solution. This is for instance the

Company X in State A. As we have seen in situation 2 the OECD Model Tax Convention

case when a company receives income that is attributable to a permanent establishment in

does not provide a solution for double source

another State. In other cases, the OECD decided

17

income .

on purpose not to include a standard solution

State C

in the Commentary. This is for instance the case where a company with a permanent

State C is the state of residence of the recipient

establishment in another State pays to a

of the dual sourced interest. Under Art. 11,

resident of a third State interest on a loan that

paragraph 1, of both the A-C and the B-C tax treaties, State C has an unrestricted right to tax

is being used for the purposes of the permanent establishment. Changes to the Commentary to

the interest received from company X. However,

Art. 4, paragraph 1, of the OECD Model Tax

under the elimination of double taxation articles

Convention have been made to combat the use of dual resident companies with an objective to

in the A-C and B-C tax treaties, State C is obliged to give a foreign tax credit for the tax

benefit more from tax treaties.

paid in States A and B respectively. The total

17

In the case of a dividend payment by a dual resident company the Dutch Supreme Court decided in its decision of 2 September 1992, nr. 27 252, BNB 1992/379, that the Netherlands – being the State that lost out in the tiebreaker rule – could not impose tax on the dividend paid to a shareholder in the USA. According to the Dutch Supreme Court , Art. 10, paragraph 5, OECD Model Tax Convention would prevent taxation in the Netherlands. I feel that this decision is not correct in view of the recent changes to the OECD Commentary. Moreover, Art. 11 OECD Model Tax Convention does not contain a provision similar to Art. 10, paragraph 5, OECD Model Tax Convention.

144


Ajay Vohra Mr Ajay Vohra is the Managing Partner of the Corporate, Tax and Business Advisory Law Firm, Vaish Associates, Advocates at New Delhi, Gurgaon and Mumbai, which is part of the World Law Group, an alliance of law firms of 37 countries from across the globe. Mr. Ajay Vohra is a qualified Chartered Accountant, and also an advocate. He has been practicing since the last 25 years in the area of domestic and international tax and is a leading arguing counsel before Tax Tribunals, High Courts and the Supreme Court. The Courts have often acknowledged and referred with compliments to his contribution. He enjoys enormous credibility, respect and goodwill amongst the business and professional community. He is actively involved in the M & A practice of the firm. Mr. Vohra has been regularly contributing articles in various journals and addressing seminars nationally and internationally. Amongst various positions held are Member of Executive Committee of International Fiscal Association – India Branch, Member of Managing Committee / Chairman of the Direct Taxes Committee of the PHD Chamber of Commerce and Industry, Co-Chairman of the Direct Taxes Committee of FICCI, Vice Chair of the Tax Law Committee of the International Pacific Bar Association and Member of Board of Directors / Regional Coordinator for Asia-Pacific Region, of the World Law Group. Mr. Vohra has been rated as one of the “most highly-acclaimed legal experts in the Asia-Pacific region” in the field of Taxation by Asialaw Leading Lawyers survey for the year 2006, 2007 and 2008.

145


Sushil Lakhani Founder, M/s. Lakhani & Associates Sushil Lakhani is a Fellow member of the Institute of Chartered Accountants of India with 27 years of experience in taxation. He is the Founder of M/s. Lakhani & Associates, a chartered accounting firm with diversified practice in International Tax & FEMA. He has been a faculty at various courses & seminars of Institute of Chartered Accountants of India (WIRC), Bombay Chartered Accountants Society, International Fiscal Association (IFA), Chamber of Income Tax Consultants and National Academy of Direct Taxation. He has authored a publication titled "TDS on Payments to Non-Residents & Foreign Companies" for The Chamber of Income Tax Consultants, Mumbai, and coauthored a publication titled "EPC Contracts-A Monogram" for the Bombay Chartered Accountants’ Society. He is presently the Hon. Secretary of IFA-India Branch and an active member of International Taxation Committee of Bombay Chartered Accountants Society, Taxation Committee of Indian Merchants' Chamber and Managing Committee of IFA - Western Regional Chapter.

146


Brain Trust Session Questions for Mr. Sushil Lakhani:

in Chennai. Some times the clients of Mr. Sun

Question 1:

requests Mr. Sun to send his written submissions

Do the following constitute a PE:

in which case Mr. Sun does not come personally to argue the case. In such cases, the case is decided on the written submissions given by Mr.

• Office of a Partner; • A Commission Agent of an undisclosed principal

acting

independently

of

Sun. Does Mr. Sun have a PE in India?

the

principal; • A subsidiary whose only business is that of BPO to its parent; • Are limited risk manufacturers who produce a product and supply the same to a

customer

instructions

in of

his a

country

Principal

on

situated

the in

another country be a PE of the principal, even-though he is remunerated under ALP?

Question 3: Bad Coffee is a business run by Mr. Anand in Wagah, which sells high-caffeine energy drinks to young people. He runs his business in a very informal manner. Mr. Anand employs Sheriff who sells his products at the weekends from a building just over the border in Pakistan, which is occupied illegally by some of his friends. Does Mr. Anand have a fixed place at his disposal in Pakistan?

Question 2: Mr. Sun is an Indian lawyer and CA but based in Colombo. Mr. Sun has clients, in Chennai. Mr. Sun comes in India in the morning flight (arrival time in Chennai 0830 hours) goes straight to the Chennai High Court/ Income Tax Appellate Tribunal argues the case and leaves to Colombo by the evening flight (departure time from Chennai 2115 hours). During the day, Mr. Sun also takes time to meet his family who are 147


Question 4:

2.

Whether Revenue has jurisdiction to issue a Show Cause Notice to the Indian Company?

3.

Whether provisions of Section 195 have

Issues in OECD Business Restructuring Report: • •

To what extent can tax administrators disregard or recourse tax payers contracts;

extra territorial application, which creates

How

an obligation to withhold tax under Section 195 in an offshore transaction involving two

to

determine

remuneration

for

transfers of business opportunity; •

non-residents and payment outside India,

How to determine arms length remuneration for a risk-stripped entity post

even assuming that such transaction is chargeable to tax?

conversion; •

4.

How and where to allocate efficiency gains

Assessee-In-Default is unconstitutional to

derived from restructuring. •

Whether the recent amendment relating to the extent it is retrospective?

How will the country, which has lost the

5.

business, collect the taxes if post conversion

What is the Capital asset transferred- Is it: a. Business/economic interest in a group,

the entity does not have any business left in that country?

joint venture (quasi partnership) interest in India – successor in interest b. Right to telecom license, use of brand, goodwill and non compete right c. Right to enter Indian market d. Controlling

interest,

indirect

equity

interest, loan interest, right to manage? Question 5 A telecom company in India has a large stake held by a company (M1) based in Mauritius. M1 (the only asset of M1 is the share in the Indian Company) is itself held by another company (M2) based in Mauritius. M1 and M2 both hold valid Global Business Licenses (GBL1) and

tax

residency

certificates

(TRC)

in

Mauritius. M2 is in turn held by a company in the British Virgin Islands (BVI). The shareholders

Question 6: A private equity fund organized as a company is

of the BVI Company sell their entire stake in BVI

based out of Luxemburg. Its research team based

Company to a company based in Netherlands.

in London who get paid based on the net gains made by the fund. The fund has invested in

Issues:

Indian equities. Of late, the fund has been

1.

Would the sale of shares of the BVI

liquidating its portfolio of investments by selling

Company exit attract Indian capital gains taxes?

on the stock exchange either by way of ‘block trades’ or by way of small quantity sales which may not affect the market prices of the scrips. 148


Issues:

Question 8:

a.

What would be the Indian tax implications

A UK based arranger; S plc receives a fee from a

for the private equity fund and the research

special purpose vehicle, T &Co based in the EU.

team?

The funding arranged is by way of equity and

Would the analysis differ, if the research

debt for an acquisition transaction where the ultimate target is an operating company, N Inc.

b.

office compensated on cost plus basis? c.

in the US. The acquirer group, I Ltd. is based in

If the research team is located in India

India, the acquirer’s global holding company,

would that make any difference? d.

IGHQ & Co is based in mainland Europe and the target’s holding company NHQ Pte Ltd. is in

If the investment advisory board of the fund (as opposed to the research team) were to be

Singapore. Which of the countries will have the

based in India would that change the analysis?

right to tax the fees received by S plc?

Question 7: A Hong Kong based fund arranger, H Ltd. receives fees for advising a client, E Inc. and arranging funding in a Singapore based special purpose vehicle, B Pte Ltd. E Inc is based in the

Question 9:

US and is looking at a target company P Ltd. in

UAE 1 Limited is a company incorporated in the United Arab Emirates and is the managing

India. The shares in P Ltd. will be held in a new company, E Bv in the Netherlands. Which

agent of its 100% subsidiary UAE 2 Limited. For

jurisdiction(s) will prima facie have the right to

managing

tax the fee.

management fee of 10% of UAE 2 Limited’s profits. UAE 2 Limited is engaged in the business

UAE

2

Limited

it

receives

a

of management consultancy and is located in the Dubai Free Trade Zone and under the law is granted an exemption from payment of taxes for the next 50 years. UAE 2 Limited gives management consultancy services to clients throughout the world. It has three projects in India for advising three different Indian corporate entities, two of the projects last for 6 months each and one lasts for 10 months. Can UAE 1 Limited be taxable in India on its managing agent’s income? Can the PE of UAE 2 149


Limited, be also deemed to be a PE of UAE 1 Limited in view of the interrelations between the

UK to TSL’s satellite /transponder. The signals are then downlinked by Cable Operators/DTH

companies?

Service Providers in respective countries. USBL proposes to appoint Ooper Niche Limited (ONL), an Indian Company, as its sole marketing agent. While the

Question 10: Jackson of the United States of America is a

channel channel

subscription revenue will be collected and

leading singer and member of the famous rock

remitted by ONL to USBL, for the advertisement

band ‘Mike Star’. A US based company has signed a lump sum contract with Mike Star (a

slots/revenue, USBL is exploring the following options:

US based Company) to do a concert in Chennai.

• USBL sells the advertising inventory to ONL

Apart from the above, Mike Star is entitled to

at an agreed price who then markets the

advertisement/sponsorship and India telecasting right during the Concert. A Dutch company

same independently at its own price; or

would provide all the technical equipments,

• ONL markets the advertisement slots at

material and services including side musicians/

prices fixed by USBL and retains an arm’s

performers, etc for the Concert for a lump sum price. What is the:

–length consideration for its services; or

Taxability of Mike Star in India?

Taxability of overseas side musicians / performers in India?

• ONL will market the advertisement slots at the

best

possible

price

and

remits

a

prescribed percentage thereof to USBL. • USBL also insists that ONL should demerge its other small business (e.g. newspaper

Whether the Dutch Company would be

advertising booking, etc) into a New Indian

taxable in India?

Company. • USBL has recently acquired global telecast rights of a T20 Cricket event in Tanzania from

Tanzanian

Cricket

Board

(an

independent body in Tanzania) (‘TCB’) between India, england Tanzania which matches are proposed to be ltelecast live on ‘Zen Sports’ including India.

Question 11:

Issues:

UK Sports Broadcasting Limited (USBL) is a UK Tax Resident / incorporated company beaming ‘Zen Sports’ in various countries.

Whether TSL is taxable in India on payments received from UBSL in any scenario?

USBL will

soon beam ‘Zen Sports’ in India. Tara Satellite

Whether TCB could be taxable in India in any

Limited (‘TSL’) is a Singapore Tax Resident / incorporated company engaged in global

scenario?

network telecommunication business. TSL owns and operates satellites located around 36K kms above the Earth. USBL uplinks its ‘Zen Sports Channel’ through its own unlinking facility in 150


Question 12:

Questions for Mr. Ajay Vohra

KBC Corporation Pte. Limited (KBC) is an IPR

Question 13:

holding

Tax

A Multinational Enterprise (MNE) company is

Resident of Singapore. KBC has developed and

engaged in manufacture and sale of customized software products. A Singapore Company (SCo)

company

incorporated

and

owns the Program Rights (‘the Rights’) for an innovative / adventurous TV serial titled “VR

a wholly owned subsidiary acts as an agent/

Millionaire”. KBC proposes to assign / transfer

distributor for India for the MNE. The Singapore

all the rights, title and interests in respect of the

Company has in turn appointed four Indian agents in respect of its agency business for the

above Rights for the Indian Territory to TAAZA Entertainment Private Limited (TEP) an Indian

MNE. The Indian Agents solicits orders for

company for a lumpsum consideration of USD

onward transmission to the SCo. SCo has the

17 million plus 5 per cent net income earned by

authority to accept orders on behalf of the MNE. The method of transacting the sale of software is

TEP from such program for two years. The transfer of above rights from KBC to TEP will be

two fold a) In the first scenario the MNE transfers

in perpetuity i.e. for the life of the rights. TEP

the

plans to locally produce this TV Serial and

transaction to SCo., which in turn sells at a cost plus mark up to the Indian Agents who sell the

market it to one of the leading TV channels in India. The Agreement for the sale of the rights

goods

on

a

principal

to

principal

product to an Indian concerns. The entire

will be signed outside India and also the

transfers in this process will takes place only

consideration will be paid by TEP to KBC outside India.

after the order is booked and also the software (in a customized form) is developed by the MNE.

Issues for consideration

The Issues are:

1.

Is the income arising to KBC in the nature of taxable Royalty or Capital Gains under the Act?

of the customized software between the MNE and SCo be chargeable to tax in India?

Is the income arising to KBC in the nature of

2.

taxable Royalty or Capital Gains under the India-Singapore Tax Treaty? • •

Whether the profits arising from the transfer

Can the agents be treated as a permanent establishment of the MNE.

3.

If

transfer

pricing

conditions

are

not

Whether any of the above is impacted by the

satisfied would it make a difference to the

fact that the Rights relate only to India?

conclusion arrived at in questions 1 & 2?

Whether the response to above would change if KBC was a Tax Resident of USA and the applicable Tax Treaty was the India-USA Tax Treaty and not the IndiaSingapore Tax Treaty?

151


b)

The second method of dealing is that MNE develops the customized software and

engineers who will oversee all policy decisions with regard to the power project. UAECO will

directly transfers the same to the Indian

have a regular project office in India. The

customers without the intervention of either

implementation of civil construction, erection,

SCo or the India agents after orders are solicited by the India agents. Whether profits

commissioning segment is likely to endure for 36 months. I Ltd. [which is an experienced

accruing to USA Inc. would be chargeable

construction company] is likely to play the role of

to tax under Article 7 or Article 12.

an important sub contractor for UAECO in India. Design work relevant to civil construction, erection, commissioning will be got done by UAECO through its office in Norway. The agreement with the Authority specifies this amount separately. Issues: 1.

Is the project of UAECO a qualifying project within the meaning of section 44BBB of the Act? For application of section 44BBB, does it matter that the entirety of work forming part of Turnkey project is not to be handled

Question 14:

and performed by UAECO?

A group of two companies’ viz. N Ltd. of Norway

2.

and I Ltd. of India won a bid for one turnkey power project in India. Both the companies are

denied on the ground that one of the shareholders

signatories to the agreement signed with the agreement between two companies specifying their respective role and responsibility, as also, the

methodology

of

of

UAECO

is

an

Indian

company and/or that I Ltd. is to work as a major sub-contractor?

Authority. There is an umbrella co-ordination

specifying

Can applicability of section 44BBB be

3.

Can applicability of section 44BBB be denied if the A.O. were to dispute binding validity of double tax avoidance agreement

working.

Indemnities and guarantees have been provided

which India has signed with UAE?

by both the companies to the Authority on joint and several basis. The agreement carries break

4.

Will the amount received by UAECO for embedded designs section 44BBB?

up of the price relevant to different components such as equipment supply, civil construction, designing, etc. For commercial reasons, the parties decided that the work in the segment of

5.

be

processed

under

Can A.O. determine tax liability at a figure

commissioning

higher than one warranted under section 44BBB if income reflected in profit and loss

might be entrusted to a company registered in

account of project office is higher than 10%

UAE comprised of N Ltd. and I Ltd. as its shareholders. The company at UAE is an

of the consideration ?

civil

construction,

erection,

existing joint venture company of the parties

6.

Can UAECO opt for section 44BBB on selective basis in some of the years forming

undertaking similar turnkey projects in UAE.

part of the project? Can it opt for selection

UAE company is equipped with office and 152


on a project to project basis? 7. 8.

withhold any taxes from interest payments to X USA.

Will UAECO be subject to MAT liability under section 115JB of the Act?

Issues:

If the A.O. alleges any default in the matter of tax deduction by the project office, can

1.

there, in view of section 40(a), be an attempt

of X India?

at enhancing income base beyond the level

2.

specified in section 44BBB? 9.

Whether interest payable by X India to X USA is an allowable deduction in the hands Whether interest received by X India from X USA is taxable in the hands of X India?

Will there be any liability to deduct tax at source in respect of sub contract payments made to I Ltd.?

Question 16: U is a bank incorporated in the UK. It is listed on the London Stock Exchange. It is also listed Question 15: X Bank LLC. (‘X USA’), is a non-resident

in a few other stock exchanges around the world. It has, in the past, never had any government

company,

and

ownership. It has operations in several parts of

qualifies as a tax resident of USA under the

the world either as a subsidiary incorporated in

provisions of the Agreement for Avoidance of Double Taxation between India and US (‘India

those local jurisdictions or as a branch. During the past few years, it has sold parts of its loan

US treaty’). • X USA is carrying on banking

portfolio in smaller lots to various investors by

activities in India, through its branch X Bank,

issuing participation certificates. Over the past

India Branch (‘X India’) registered as per the RBI regulations. Hence, X USA has a permanent

few months, these certificates have significantly deteriorated in value. The investors have

establishment (‘PE’) in India in the form of X

approached the bank to retire the participation

India. • X India pays interest to X USA, on X

certificates at values higher than the current

USA’s Vostro balances with X India. Similarly, X India earns interest income on its Nostro

market price. Over the last one year, U has received government funding towards it capital

account with X USA. X India has been filing its

and the government ownership is close to 70%.

return of income claiming benefits under the

As the government is keen on this request from

India US treaty, in which:– the interest received by X India from X USA

investors, U is contemplating buying these certificates as part of its own treasury operations

is offered to tax, and the interest paid by X

and holding them until the original unwind

India to X USA has been claimed as a

stage. In India, U’s participation certification

deductible expenditure. X India does not

relate to loans made locally in India. The default rates on the underlying portfolio have not

incorporated

in

the

USA,

153


changed significantly from the time that the certificates were issued. In the past, for Indian

Question 19:

tax purposes, U has included in its business

Repair Overhaul (MRO) in an existing Airport

income, the gain on sale of the portfolio when

qualify as ‘new infrastructure facility?

1. Will the additional facility for Maintenance

the certificates were issued. Such gain was amortized in the books over the tenor of the portfolio for local GAAP reporting. What are the tax issues involved in the proposal to buy the certificates from investors. Will there be any change, if U operates in India as a locally incorporated

subsidiary

and

the

subsidiary

Question 20:

does not have sufficient current profits?

A

Multinational

Company

engaged

in

the

manufacture of FMCG products has introduced a new premium product in India under test market stage until threshold sales achieved and would subsequently commence manufacturing activities. The Company would like to price the import price as per group TP policy that is cost plus 10%. Due to heavy marketing expenditure, the

company

posted

a

negative

operating

Question 18:

margin (‘OM’). TPO does not agree with the

a.

Will widening/up-gradation of roads be covered under “new” infrastructure” for

Import price on the ground that market penetration strategy does not justify loss and

claim of tax holiday?

hence import prices not at arm’s length. How his

b.

case needs to be defended before the Appellate

Who will be entitled to claim depreciation on roads developed by a developer. Is it the

authorities.

Developer or the Government authority? c.

Whether roads developed by the developer would classify as ‘Buildings’, ‘Plant and Machinery’ or an ‘inventory’ for the purpose of claim of depreciation?

d.

Is it possible to capitalize the right to build an infrastructure-as an Intangible asset by

Question 21: A 100% subsidiary of a US entity is a captive

the Developer?

software service provider. It is remunerated on an hourly basis. TP study characterized subsidiary as low risk service provider and the hourly rates were benchmarked using industry averages. During the year, subsidiary made an operating loss. The TPO concluded that no documentation was done to substantiate efforts 154


made to service third parties to utilize its idle capacity for no marketing functions performed,

The issues are: •

no marketing/sales promotion expenses incurred

Whether the Trust will be liable to tax in India in scenarios (i), (ii) and (iii) on its income?

and hence the assessee is a risk mitigated service

provider and should not incur operating losses. How his case needs to be defended before the

Whether the Indian resident beneficiaries will be subject to tax in India on the income earned by the Trust when the trust receives the income

Appellate authorities.

but the same is not distributed in all the three scenarios?

A US based bank has lent funds to its Japanese

Whether the Indian resident individual would

subsidiary at US Fed Funds rate less 20 basis

be liable to Indian tax when income is

points. The Japanese subsidiary in turn lends to

distributed by the Trust in all the three

J’s Indian operations at the US Fed Fund rate less 25 basis points. J’s Indian operations are

scenarios? •

rated AAA+ in India, its Japanese subsidiary is

Indian tax when the income is not distributed

rated AA in Japan, whereas J is rated AAA in the

by the Trust in all the three scenarios?

US. J is able to borrow in the US markets at Fed Fund rate less 10 basis points. Can the US,

Whether British resident individuals would be liable to Indian tax when the income is

Japanese or Indian authorities object to the pricing of funds in this manner?

Whether the British residents would be liable to

distributed by Trust in all the three scenarios?

If so, what •

could be J’s defence of these arrangements?

Whether the Indian resident beneficiaries be taxed in the UK on the income from the trust?

Whether the Indian resident beneficiaries would be able to claim credit in India for any foreign tax paid on the income of the foreign discretionary trust, distributed to him?

Whether the Indian resident

beneficiaries

would be able to claim credit in India for any foreign tax paid on the income of the foreign

Question 22:

discretionary trust, distributed to them.

A Non- resident sets-up a Discretionary Trust in British Vigin Islands (BVI). The beneficiaries of

Whether the Indian tax department would

such a trust are Indian Resident Individuals and

recognize the tax paid by the trustee as being

British Residents. The Trust makes investments

the tax suffered by the beneficiaries u/s. 91?

in offshore companies/assets and earns income. BVI, being a tax haven, the Trust is not subject to tax in BVI. Income is in the form of interest, dividends and capital gains from its investments in the offshore companies. Three alternative scenarios as regards the person who is the trustee of the trust: (i) a person resident in BVI; (ii) a person resident in the UK; (iii)a person resident in India. 155


Question 23:

Question 25:

The Authorized OECD Approach (AOA) on

Is functionally separate entity approach a better

attribution of profits to a PE contains the

way to attribute profits than related business

following steps:

activity approach?

1.

Hypothesize the PE as a separate and distinct enterprise.

2.

Attribute to the PE functions, transactions / contracts with third parties, assets, risks, free capital.

3.

Apply the arm’s length principle and TP

Question 26:

Guidelines by analogy to the “dealings” recognized between the PE and other parts

Mr. X is a director and a whole time employee of a European Company (Eco) and a director of

of the enterprise it belongs to.

the Eco’s subsidiary. Mr. X has visited India for a total of 21 days in the whole year, each visit What is the manner in which assets & liabilities

not extending beyond 2 days at a time. His visits

are to be allocated to a PE for example (a)

are important calls to liaise with and entertain

capital (b) reserves (c) corporate bank loans and

prospective customers of the Indian Company and out of the 21, 10 days he was on a brief

interest to be allocated (d) patents owned? (e) Can Partners Capital account represent part of the

business

Establishment

property (PE).

Is

of

the

interest

business-cum-holiday in Kerala, which is fully

Permanent payable

paid by the Indian company. Mr. X receives Euro

on

100,000 per month as salary (his duties specifically include managerial functions (as a

partners capital account a “Debt Claim”?

director of the Indian company)) and US $ 2000 as Directors Sitting Fees of the Indian company (However, no Board meeting of the Indian Company has taken place in India). What would be the taxability of these two amounts in India? Should Mr. X file a Return in India. Question 24: The starting point for attribution should be the PE’s profits is the FAR analysis should lead to a proper Profit Split between the PE and the Head Office. Does the corollary – Profits of all PEs plus HO should not exceed global profit of the

Question 27:

Enterprise correct?

Whether Indian tax authorities objection before FIPB against some Cyprus based companies was justified as per current tax provisions of India?

156


INTERNATIONAL FISCAL ASSOCIATION About IFA : The International Fiscal Association (IFA) was established in 1938 with its headquarters in the Netherlands. It is the only non-governmental and non-sectoral international organization dealing with fiscal matters. Its objects are the study and advancement of international and comparative law in regard to public finance, specifically international and comparative fiscal law and the financial and economic aspects of taxation. IFA seeks to achieve these objects through its annual Congresses and the scientific publications relating thereto as well as through scientific research. Although the operations of the IFA are essentially scientific in character, the subjects selected take account of current fiscal developments and changes in local legislation. Membership of IFA now stands at more than 11,500 from 96 countries. In 57 countries IFA members have established IFA Branches. Direct membership is possible in countries where there is as yet no IFA Branch. About IFA-India : IFA-India branch was formed in the year 1983 and currently has more than 500 members. Besides representatives from public and private undertakings and eminent Tax professionals, its membership includes the Central Board of Direct Taxes, Authority for Advance Rulings, National Institute of Public Finance and Policy and the Reserve Bank of India. Currently, the IFA India branch has chapters in Southern, Western and Northern regions. About IFA-SRC : The Southern Regional Chapter of IFA India was formed in the year 2002 and currently has more than 60 including 13 corporate members. IFA-SRC has been playing a complimentary role to IFA India branch in disseminating knowledge on International Taxation. IFA-SRC conducts at least two meetings every month on subjects of topical relevance with speakers drawn from among the finest in India and abroad. IFA-SRC has been hosting Annual Conferences every year on International Tax and the current conference is centered on the theme “International Taxation – Today’s issues”. We extend a warm welcome to the Conference. www.ifasrc.org | admin@ifasrc.org


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